Are IRAs Taxable? Traditional, Roth, Conversions, and RMDs

Yes, IRAs are taxable, but when and how much depends on the type. Money in a traditional IRA is generally taxed as ordinary income when you withdraw it, at federal rates that run from 10 percent to 37 percent for 2026.¹ Money in a Roth IRA has already been taxed, so qualified withdrawals come out entirely tax-free. Between contribution and withdrawal, both types grow without annual tax on interest, dividends, or gains. The complications sit at the edges: early withdrawals, conversions, required distributions after a certain age, and what happens when an IRA is inherited.

Traditional IRA: Deduct Now, Pay Tax Later

A deductible contribution to a traditional IRA lowers your taxable income the year you make it. If you contribute $7,500 and qualify for the full deduction, your adjusted gross income drops by that amount.² Whether you qualify for the deduction depends on your filing status, your income, and whether you or a spouse is covered by a workplace retirement plan; if neither of you is covered, the deduction is available at any income level.³

The deduction is a loan against future taxes, not a gift. Every dollar you eventually withdraw — original contributions and all the growth on top — is taxed as ordinary income in the year you take it out. Your financial institution reports the distribution on Form 1099-R, and you report it on Form 1040.⁴ The idea is that many people are in a lower bracket in retirement than during their working years, so paying tax then costs less than paying it now.

Nondeductible Contributions

If your income is too high for the deduction, you can still put money in a traditional IRA. Those nondeductible contributions use dollars you have already paid tax on, so only the earnings are taxed when you withdraw. You have to file Form 8606 for every year you make a nondeductible contribution so the IRS knows which part of your future withdrawals has already been taxed.⁵ Skipping the form carries a $50 penalty and, worse, risks paying tax twice on the same dollars because you cannot prove your basis.

Roth IRA: Pay Tax Now, Withdraw Free Later

Roth contributions get no upfront deduction. In exchange, both your contributions and all the investment growth can come out tax-free once the account is qualified. This tends to favor anyone who expects to be in the same or a higher tax bracket in retirement than they are now.

You can also withdraw your own Roth contributions — not earnings — at any age, tax-free and penalty-free. That flexibility does not extend to earnings, which have their own rules.

The Two Five-Year Rules

Roth withdrawals of earnings are tax-free only after five tax years have passed since your first contribution to any Roth IRA. The clock starts January 1 of the year of that first contribution, whatever month you actually made it. Open your first Roth in March 2024 and the five-year period runs from January 1, 2024 to January 1, 2029. Pull earnings out earlier and you owe income tax on them, plus a 10 percent penalty if you are under 59½.⁶

A separate five-year clock applies to each Roth conversion. If you take converted money out before 59½ and before five years have passed since that specific conversion, the 10 percent penalty applies to any portion that was pre-tax before conversion. Once you are over 59½, this conversion clock no longer matters for the penalty.

Early Withdrawals and the 10 Percent Penalty

Take money out of a traditional IRA before 59½ and you owe an extra 10 percent on top of the regular income tax.⁷ For Roth accounts, contributions come out freely, but early withdrawals of earnings hit the same 10 percent penalty plus income tax.

The tax code carves out situations where the 10 percent penalty is waived. The most commonly used ones:⁸

Death of the owner, or the owner’s permanent disability
Substantially equal periodic payments based on life expectancy, taken for at least five years or until 59½, whichever is longer
Unreimbursed medical expenses above 7.5 percent of adjusted gross income
Up to $10,000 lifetime for a first-time home purchase
Qualified higher education expenses for you, a spouse, children, or grandchildren
Distributions taken to satisfy an IRS levy
Health insurance premiums while receiving unemployment compensation for at least 12 consecutive weeks

SECURE 2.0 added three more exceptions starting in 2024: terminal illness certified by a physician (life expectancy of 84 months or less), domestic abuse withdrawals up to the lesser of $10,000 or 50 percent of the account, and one emergency personal expense withdrawal of up to $1,000 per year.⁸

An exception only waives the 10 percent. Traditional IRA distributions taken under an exception are still taxed as ordinary income.

Required Minimum Distributions

Traditional IRA money cannot stay tax-sheltered forever. Starting at age 73, you must take a required minimum distribution (RMD) each year.⁹ The starting age moves to 75 for people who turn 74 after December 31, 2032. Roth IRAs have no RMDs for the original owner, which is one of the Roth’s biggest tax advantages.

Each year’s RMD is your December 31 balance from the prior year divided by a life expectancy factor from IRS tables. The divisor shrinks with age, so the required amount grows over time and pushes more money into taxable income. Every dollar of a traditional IRA RMD is taxed as ordinary income for the year it is taken.⁹

Miss an RMD and you owe a 25 percent excise tax on the shortfall.¹⁰ Fix the mistake within the IRS’s correction window and the penalty drops to 10 percent. If you own several traditional IRAs, you calculate the RMD separately for each but can pull the combined total from just one account.¹¹

Qualified Charitable Distributions

Once you are 70½, you can send up to $111,000 per year from your IRA directly to a qualified charity, and the transferred amount is excluded from your taxable income.¹² The money has to move directly from the custodian to the charity; if it lands in your account first, it becomes a taxable distribution. A qualified charitable distribution can also count toward your RMD, which is why many retirees who do not need the income prefer it to withdrawing and then donating.⁴

Roth Conversions

Anyone, at any income level, can convert money from a traditional IRA to a Roth. The catch is that the converted amount is added to your taxable income for that year. Convert $50,000 and you owe income tax on $50,000 as if you had earned it.

High earners locked out of direct Roth contributions sometimes use a “backdoor” approach: make a nondeductible traditional IRA contribution and then convert it to a Roth. Because the contribution was already after-tax, only any growth between contribution and conversion is taxable. Both steps go on Form 8606.⁵

The Pro-Rata Trap

The backdoor works cleanly only if you have no other pre-tax money in traditional, SEP, or SIMPLE IRAs. If you do, the IRS uses the pro-rata rule and treats every conversion as coming proportionally from all your pre-tax and after-tax IRA dollars combined. Say you hold $92,500 in a pre-tax traditional IRA and add a $7,500 nondeductible contribution; roughly 92.5 percent of anything you convert is taxable, even if you meant to convert only the fresh $7,500. Rolling the pre-tax balance into an employer 401(k) before the conversion sidesteps the problem, because 401(k) balances are not included in the pro-rata calculation.

Taxes on Inherited IRAs

When an IRA owner dies, how the account is taxed depends on who inherits and what kind of IRA it is.

Surviving Spouses

A surviving spouse can roll the inherited IRA into their own IRA and treat it as if it had always been theirs, with distributions timed to their own age and RMD schedule.¹³ If the inherited account is a Roth and the deceased spouse had met the five-year rule, later qualified withdrawals remain tax-free.

Eligible Designated Beneficiaries

Certain non-spouse heirs can stretch distributions over their own life expectancy rather than emptying the account on a 10-year schedule. They include minor children of the account owner (until they reach the age of majority, when the 10-year clock then starts), disabled or chronically ill people, and beneficiaries no more than 10 years younger than the deceased.¹⁴ Any of them can instead choose the 10-year rule if they want faster access.

Everyone Else

Other non-spouse beneficiaries must empty the entire inherited account by December 31 of the year containing the 10th anniversary of the owner’s death.¹³ For an inherited traditional IRA, every withdrawal is taxable income to the beneficiary in the year received, so how you spread the withdrawals across the 10 years matters. A single large distribution can push you into a much higher bracket. Missing the 10-year deadline triggers the same 25 percent excise tax that applies to a missed RMD.

An inherited Roth IRA still has to be emptied within 10 years, but the distributions are generally tax-free provided the original owner had satisfied the five-year contribution rule. A successor beneficiary — someone who inherits from the original beneficiary — has to empty the account within 10 years of that original beneficiary’s death, and cannot switch to a life-expectancy schedule.¹³

State Income Tax on IRA Withdrawals

Federal tax is only part of the answer. Most states tax traditional IRA distributions as ordinary income, at rates ranging from roughly 2 percent to over 13 percent. Eight states have no individual income tax, so IRA distributions escape state tax entirely there. Several other states exempt some or all retirement income for qualifying seniors. Rules vary widely and change, so check your own state’s current treatment before taking a large withdrawal or planning a Roth conversion.

Avoiding Two Costly Mistakes

Contributing more than the annual limit to your IRAs triggers a 6 percent excise tax on the excess for every year it stays in the account.¹⁵ Withdraw the excess and any earnings on it by your tax filing deadline (including extensions) and you avoid the penalty.

Prohibited transactions are worse. If you or a disqualified person — a spouse, parent, child, or the account’s fiduciary — engages in a prohibited transaction such as borrowing from the IRA, selling personal property to it, or pledging it as collateral, the account can lose its tax-advantaged status as of January 1 of that year.¹⁶ The entire balance is then treated as a distribution, with income tax and potentially the 10 percent early withdrawal penalty on top. Treating your IRA as fully separate from your personal finances is the simplest protection.

1
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Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
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Internal Revenue Service. Prohibited Transactions