How Are IRA Distributions Taxed? Rules, Penalties, and RMDs

IRA distributions are taxed based on the type of account and your age when you withdraw. Money from a Traditional IRA is generally included in your gross income and taxed at ordinary federal income tax rates, which run from 10% to 37% in 2026.¹ Qualified withdrawals from a Roth IRA are entirely tax-free. Take money from either account before age 59½ and you generally owe an extra 10% penalty on top of any regular income tax, unless one of a long list of exceptions applies.

Traditional IRA Withdrawals as Ordinary Income

Every dollar you pull from a Traditional IRA holding only deductible contributions and earnings is included in your gross income for the year and taxed at ordinary rates.² The withdrawal stacks on top of your wages, interest, and other income, and the combined total decides your bracket. For 2026, single filers start at 10% on the first $12,400 of taxable income and hit the top 37% rate above $640,600; married couples filing jointly reach 37% above $768,700.¹

You report the distribution on Form 1040. Line 4a shows the total amount you took out, and line 4b shows the taxable portion.³ For a fully deductible account, those two numbers match.

One benefit worth knowing: Traditional IRA distributions are not subject to the 3.8% Net Investment Income Tax, even though other investment income can be. The IRS specifically excludes distributions from IRC Section 408 accounts from the NIIT calculation.⁴

What Happens If You Made Non-Deductible Contributions

If you ever put money into a Traditional IRA without claiming a deduction, part of your balance has already been taxed. You cannot pull that after-tax money out first. A pro-rata rule applies: every distribution is treated as a proportional blend of pre-tax and after-tax dollars based on the ratio across all of your Traditional IRAs combined.⁵

Say your total Traditional IRA balance is $100,000 and $20,000 came from non-deductible contributions. Then 20% of any withdrawal is tax-free and 80% is taxable.

Tracking basis takes paperwork. File IRS Form 8606 for every year you make a non-deductible contribution or take a distribution from an account holding after-tax money. The form calculates the tax-free portion and carries the remaining basis forward. Skip it and the IRS has no record that part of your balance was already taxed, which risks double taxation. The penalty for failing to file when required is $50.⁶

How Roth IRA Distributions Are Taxed

Roth contributions go in after tax, so no deduction is allowed up front.⁷ The payoff comes later. A qualified distribution from a Roth IRA is entirely excluded from gross income. Two conditions must both be met:

At least five tax years have passed since January 1 of the year you first contributed to any Roth IRA.
You are at least 59½, disabled, or using up to $10,000 for a first-time home purchase.

Withdrawals that don’t meet both tests follow an ordering rule. The IRS treats every Roth distribution as coming out in this sequence: your regular contributions first, then your conversion amounts on a first-in-first-out basis, and finally your earnings. Because your contributions were already taxed, they always come out tax-free and penalty-free regardless of your age or how long the account has been open. Tax only becomes an issue once you exhaust the contribution and conversion layers and start pulling earnings.

Earnings withdrawn before you satisfy both the five-year rule and the age requirement are taxed as ordinary income and may also face the 10% early withdrawal penalty. This is where most Roth planning mistakes happen. People assume everything in a Roth is always tax-free, but the earnings portion has conditions attached.

Roth Conversions Have Their Own Clock

Money converted from a Traditional IRA to a Roth IRA carries its own five-year clock for penalty purposes, and each conversion starts a separate clock. Withdraw a converted amount before age 59½ and before five years have passed since that conversion, and you owe the 10% penalty on any pre-tax amounts that were converted. After 59½, converted funds can come out penalty-free regardless of the conversion’s age. Under the ordering rule, older conversions are treated as withdrawn first.

No Lifetime RMDs on Roth IRAs

Unlike Traditional IRAs, Roth IRAs are not subject to required minimum distributions while the original owner is alive.⁸ You can leave the balance untouched for your lifetime and let it keep growing tax-free.

The 10% Early Withdrawal Penalty

Take money from any IRA before age 59½ and you owe a 10% additional tax on the taxable portion, on top of any ordinary income tax.⁹ A $20,000 early withdrawal from a fully deductible Traditional IRA means $2,000 in penalty plus whatever income tax applies at your bracket. The penalty is reported on Form 5329, filed with your return.¹⁰

For Roth IRAs, the 10% penalty can only apply to earnings withdrawn early, or to converted amounts pulled out within five years before age 59½. Your original Roth contributions are penalty-free at any time.

Exceptions That Waive the Early Withdrawal Penalty

The tax code carves out situations where you can take money out before 59½ without the 10% hit. A Traditional IRA distribution is still taxable as income; only the penalty is waived. The most commonly used exceptions:⁹

Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.
First-time home purchase, up to $10,000 over your lifetime. You qualify if you haven’t owned a home in the previous two years.
Higher education expenses at an eligible institution, including tuition, fees, books, supplies, and room and board for at least half-time students.¹¹
Disability, defined as being unable to engage in substantial gainful activity due to a condition expected to result in death or last indefinitely.¹²
Health insurance premiums while unemployed, if you received unemployment compensation for at least 12 consecutive weeks.
Birth or adoption, up to $5,000 per child within one year of birth or finalized adoption.
Emergency personal expenses, one withdrawal per calendar year of up to $1,000 (or your vested balance above $1,000, whichever is less), for distributions after December 31, 2023.
Domestic abuse victims, up to the lesser of $10,000 (indexed for inflation) or 50% of the account balance, available through self-certification, for distributions after December 31, 2023.
Distributions taken to satisfy an IRS levy on the account.

Every exception requires documentation that the money was spent on the qualifying purpose. If your Form 1099-R doesn’t already reflect the exception in box 7, you claim it on Form 5329.

Substantially Equal Periodic Payments

One flexible penalty exception is the substantially equal periodic payment (SEPP) plan under IRC Section 72(t)(2)(A)(iv). You commit to a series of roughly equal annual withdrawals calculated under one of three IRS-approved methods: the required minimum distribution method, the fixed amortization method, or the fixed annuitization method.¹³

The catch is the commitment. Once you start a SEPP, you must continue for five years or until you reach 59½, whichever comes later. Modify the schedule earlier (other than because of death or disability) and the IRS retroactively imposes the 10% penalty on every distribution you took under the plan, plus interest.

Required Minimum Distributions After 73

The IRS does not let you defer taxes inside a Traditional IRA forever. You must start taking required minimum distributions once you reach age 73.¹⁴ That threshold holds through 2032. Beginning in 2033, the RMD age rises to 75.⁸

Your RMD each year is your total Traditional IRA balance as of the previous December 31 divided by a life expectancy factor from the IRS Uniform Lifetime Table in Publication 590-B. A separate table applies if your sole beneficiary is a spouse more than 10 years younger.¹⁵

Your first RMD can be delayed to April 1 of the year after you turn 73, but that means doubling up and taking two RMDs in the same calendar year. After the first year, every RMD is due by December 31.

Missing an RMD used to cost 50% of the shortfall. Under SECURE 2.0, the excise tax dropped to 25%. Correct the mistake by withdrawing the missed amount and filing an amended return within two years and the penalty falls to 10%. The tax applies only to the difference between the required amount and what you actually withdrew.

Qualified Charitable Distributions

If you are 70½ or older, you can transfer up to $111,000 directly from your Traditional IRA to a qualified charity in 2026, and that amount is excluded from your gross income entirely.¹⁶ This is a qualified charitable distribution (QCD). The money must go straight from your IRA custodian to the charity. You cannot receive the check yourself and then donate it.

A QCD counts toward your RMD for the year. If your RMD is $15,000 and you send $15,000 to charity as a QCD, you have met the requirement while keeping the income off your return. That exclusion can also help hold down Medicare premiums and reduce the taxable share of Social Security benefits.

How Inherited IRA Distributions Are Taxed

When someone inherits a Traditional IRA, distributions are taxed as ordinary income to the beneficiary, the same way they would have been to the original owner. What changes is the timeline.

The 10-Year Rule for Most Non-Spouse Beneficiaries

For most non-spouse beneficiaries inheriting from someone who died after 2019, the SECURE Act requires the entire account to be emptied by the end of the tenth year after the owner’s death.⁸

Whether you also owe annual withdrawals during that window depends on the original owner. If the owner died before reaching their required beginning date, no annual distributions are required and you just need to empty the account by year 10.¹⁷ If the owner died after that date, annual RMDs are required during the 10-year period based on the beneficiary’s life expectancy, with the remaining balance due by the end of year 10. Not planning for that compressed schedule can push you into higher brackets.

Eligible Designated Beneficiaries

Certain beneficiaries are exempt from the 10-year rule and can stretch distributions over their own life expectancy:¹⁸

Surviving spouse.
Minor child of the deceased. Once the child reaches the age of majority, the 10-year clock starts.
Disabled individual.
Chronically ill individual.
Beneficiary not more than 10 years younger than the deceased owner.

Spousal Rollovers

A surviving spouse has the most flexibility. They can roll the inherited IRA into their own IRA and treat it as if they had always owned it, following their own RMD schedule.¹⁸ Alternatively, the spouse can keep the account as an inherited IRA, which is useful for a spouse under 59½ who needs penalty-free access.

Withholding on IRA Distributions

Your IRA custodian won’t just hand over the full amount. The default federal withholding on a standard IRA distribution is 10% of the taxable amount. You can change that rate or waive withholding entirely by submitting Form W-4R to your custodian, choosing anywhere from 0% to 100%.¹⁹

The 10% default catches many people off guard. If you are in the 22% or 24% bracket, that withholding won’t cover your actual tax liability, and a large underpayment can trigger an estimated tax penalty. For a sizable distribution, either raise your withholding on Form W-4R or make a quarterly estimated tax payment to close the gap.

Eligible rollover distributions, where funds could have gone directly to another retirement account but were paid to you instead, carry a mandatory 20% withholding you cannot waive. You then have 60 days to deposit the full original amount (including the withheld 20%) into another IRA or qualified plan to avoid treating it as a taxable distribution. You are limited to one such indirect rollover across all your IRAs in any 12-month period.²⁰ Trustee-to-trustee transfers do not count against that limit and avoid the withholding problem entirely.

State Income Tax

Federal tax is only part of the bill. Most states with an income tax treat Traditional IRA distributions as taxable income, though the details vary widely. A handful of states have no personal income tax at all. Others fully tax distributions at rates that can run as high as 13.3%. Some offer partial exclusions for retirement income, often tied to age or total income. Check your state’s treatment before taking a large distribution.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
3
Internal Revenue Service. Instructions for Form 1040 – Lines 4a, 4b, and 4c
4
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
5
Internal Revenue Service. Rollovers of After-Tax Contributions in Retirement Plans
6
Internal Revenue Service. 2025 Instructions for Form 8606 – Nondeductible IRAs
7
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
8
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
9
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
10
Internal Revenue Service. 2025 Instructions for Form 5329 – Additional Taxes on Qualified Plans and Other Tax-Favored Accounts
11
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs
12
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
13
Internal Revenue Service. Substantially Equal Periodic Payments
14
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
15
Internal Revenue Service. Retirement Topics – Required Minimum Distributions
16
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
17
Federal Register. Required Minimum Distributions
18
Internal Revenue Service. Retirement Topics – Beneficiary
19
Internal Revenue Service. Form W-4R Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions
20
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions