How IRA Distributions Are Taxed: Penalties, RMDs, and Withholding

How IRA distributions are taxed depends on the account type and your age. Money pulled from a Traditional IRA is added to your other income and taxed at your federal bracket rate, which runs from 10% to 37% in 2026.¹ Money pulled from a Roth IRA comes out completely tax-free if you meet the age and holding-period tests; if you don’t, only the earnings portion is taxable. On top of that, a 10% penalty applies to early withdrawals unless a specific exception fits your situation.

Traditional IRA Withdrawals

A Traditional IRA distribution lands on your tax return as ordinary income.² The IRS stacks the distribution on top of your wages, Social Security, and any other income to decide which bracket it falls into. For 2026, a single filer moves from the 12% bracket into the 22% bracket at $50,400 of taxable income, and hits the 24% bracket at $105,700.¹ Take a big withdrawal in a single year and you can easily jump a bracket.

One tax the withdrawal does not trigger: the 3.8% Net Investment Income Tax. IRA distributions are specifically excluded from that calculation, even though they raise your adjusted gross income.³

If You Made Nondeductible Contributions

Money you put into a Traditional IRA as an after-tax (nondeductible) contribution doesn’t get taxed a second time on the way out. You can’t cherry-pick that portion, though. The IRS pools all your Traditional, SEP, and SIMPLE IRAs together and applies a ratio to every distribution. If 20% of your combined balance is nondeductible basis, then 20% of each withdrawal is tax-free and 80% is taxable.

You track the basis on Form 8606, filed with your return in any year you take a distribution and have basis in your IRAs.⁴ Lose track of the paperwork and the IRS treats the entire distribution as taxable, meaning you pay tax twice on money you already paid tax on once.

Roth IRA Withdrawals

Roth IRAs work in reverse. Contributions go in after tax, and qualified distributions come out entirely tax-free, growth included. A distribution is qualified when both boxes are checked: at least five tax years have passed since your first Roth IRA contribution, and you are at least 59½ (or the distribution is due to disability or paid to a beneficiary after your death).⁵

When a Roth withdrawal isn’t qualified, an ordering rule decides what’s taxable. Your original contributions always come out first, tax-free, since you already paid tax on that money. Only after every dollar of contributions has been withdrawn does the IRS treat the rest as earnings. Earnings withdrawn early get taxed as ordinary income, and if you’re under 59½, the 10% early withdrawal penalty applies to that earnings portion.

The five-year clock trips people up. It starts on January 1 of the tax year you made your first Roth contribution, not the date the money hit the account. Fund your first Roth in April 2023 for the 2022 tax year and the clock began January 1, 2022, ending after December 31, 2026. Each Roth conversion also starts its own separate five-year clock for the 10% penalty on the converted amount.

The 10% Early Withdrawal Penalty

Pull money from a Traditional IRA before 59½ and the taxable portion gets hit with an extra 10% tax on top of regular income tax.⁶ For a Roth, the penalty hits only the earnings portion of a non-qualified distribution, since contributions can always come out penalty-free. The penalty is reported on Form 5329.⁷

Federal law waives the 10% penalty in a long list of situations. The exceptions that come up most often for IRA owners include:⁸

First-time home purchase, up to $10,000 over your lifetime. You qualify if you haven’t owned a principal residence in the past two years.
Higher education costs for you, a spouse, children, or grandchildren at an eligible institution.
Unreimbursed medical expenses above 7.5% of your adjusted gross income, whether or not you itemize.
Health insurance premiums while unemployed, after receiving unemployment compensation for at least 12 consecutive weeks.
Birth or adoption expenses, up to $5,000 per child, which you can repay within three years.
Disability that prevents substantial gainful activity and is expected to be long-lasting or fatal.
Terminal illness, if a physician certifies a condition expected to result in death within 84 months.
Domestic abuse victim distributions, up to the lesser of $10,000 (inflation-adjusted) or 50% of the account balance, for distributions made after December 31, 2023.
Emergency personal expenses, up to $1,000 per calendar year. You generally can’t take another one from the same account for three years unless you repay the first or contribute an equal amount.⁹

Every one of these exceptions waives the penalty only. From a Traditional IRA, the distribution itself is still ordinary income unless it’s a return of nondeductible basis. Keep documentation such as medical bills, tuition statements, and physician certifications in case the IRS asks.

Substantially Equal Periodic Payments

If no single exception fits and you need ongoing pre-59½ access, you can set up a series of substantially equal periodic payments (a 72(t) schedule). Under this arrangement, you commit to a fixed stream of distributions based on your life expectancy, and the 10% penalty is waived.¹⁰ The trade-off is rigidity. You must continue the schedule for the later of five years from the first payment or the date you turn 59½. Modify the payments before then for any reason other than death or disability, and the IRS retroactively applies the 10% penalty to every distribution taken under the arrangement, plus interest.

Required Minimum Distributions

A Traditional IRA can’t grow tax-deferred forever. For anyone turning 73 between 2023 and 2032, the required beginning date is April 1 of the year after you turn 73. Starting in 2033, the age rises to 75.¹¹ Roth IRAs have no required distributions during the original owner’s lifetime.

Each year’s required amount is your total Traditional IRA balance as of December 31 of the prior year divided by a life expectancy factor from IRS tables. Miss the deadline or take less than the required amount and you owe an excise tax of 25% of the shortfall.¹² Catch the mistake and take the missing amount within a correction window that generally runs through the end of the second tax year after the penalty is imposed, and the excise tax drops to 10%.¹³ The excise tax is on top of the regular income tax you’ll owe when the distribution is finally taken.

One way to keep required distributions off your tax return once you’re 70½ or older: a qualified charitable distribution. Money sent directly from your IRA custodian to an eligible charity doesn’t count as taxable income, and it can satisfy your required distribution for the year. The 2026 exclusion limit is $111,000.¹⁴ The check has to go from the custodian straight to the charity; if it passes through your hands, it doesn’t qualify.

Federal Withholding on the Distribution

By default, your custodian withholds 10% for federal income tax on most IRA distributions.¹⁵ That’s a prepayment, not the final bill. If your actual rate is higher, you owe the difference at filing. If lower, you get it back as a refund.

You can change the withholding percentage or opt out entirely by giving your custodian Form W-4R before the distribution goes out.¹⁶ Opting out doesn’t lower what you owe; it just shifts the whole tax bill to April. Take a large distribution with nothing withheld and no estimated payments, and you can pick up an underpayment penalty on top of the tax. State withholding rules vary; some states require a minimum whenever federal tax is withheld.

Moving IRA Money Without Triggering Tax

Moving funds between IRAs doesn’t have to be a taxable event, but how you do it matters. A direct trustee-to-trustee transfer never touches you and has no tax consequences. An indirect rollover, where the custodian sends you a check and you redeposit it, gives you 60 days to complete the move. Miss the window and the entire amount becomes a taxable distribution. If you’re under 59½, add the 10% penalty.¹⁷

Indirect rollovers also come with automatic 10% federal withholding. If the custodian sends you a $50,000 check, they withhold $5,000 and you receive $45,000. To roll over the full $50,000 and avoid tax on the withheld piece, you have to come up with $5,000 from other funds and deposit the full $50,000 within 60 days. The withheld $5,000 comes back as a refund when you file.

You’re also limited to one indirect rollover across all your IRAs in any 12-month period. The IRS aggregates every Traditional, Roth, SEP, and SIMPLE IRA you own for this count. Trustee-to-trustee transfers and Roth conversions don’t count against the limit.¹⁷ Trigger a second indirect rollover within 12 months and the IRS treats the second distribution as taxable, with any amount deposited into an IRA becoming an excess contribution subject to a 6% annual penalty until corrected.

Inherited IRAs

When you inherit an IRA, the tax treatment depends on who you are to the deceased. Taxable distributions from an inherited Traditional IRA are ordinary income to the beneficiary in the year received.¹⁸

A surviving spouse who is sole beneficiary has the most options. They can roll the inherited IRA into their own, which treats the account as if it were always theirs (no required distributions until they reach RMD age, and the 10% penalty applies to withdrawals before 59½). They can also keep it as an inherited IRA and take distributions based on their own life expectancy.¹⁸

Most non-spouse beneficiaries who inherited after 2019 must empty the entire account by the end of the tenth year after the year of death. Distributions can be taken in any pattern during that decade, but the full balance has to be out by the deadline. Waiting until year ten and taking one lump sum is allowed but often creates a huge tax bill; spreading distributions across the ten years usually works out better.¹⁸

Some beneficiaries are exempt from the 10-year rule and can stretch distributions over their own life expectancy. These eligible designated beneficiaries include a surviving spouse, a minor child of the deceased owner (until they reach the age of majority), anyone disabled or chronically ill, and anyone no more than 10 years younger than the original owner. Inherited Roth IRAs follow the same timing rules, but contribution withdrawals stay tax-free, and earnings are tax-free if the original owner’s five-year period has been met.

How a Withdrawal Can Raise Your Medicare Premiums

Retirees on Medicare face a knock-on cost from large Traditional IRA withdrawals that never appears on the tax return itself. Medicare Part B and Part D premiums are adjusted upward through the Income-Related Monthly Adjustment Amount (IRMAA), based on modified adjusted gross income from two years earlier. A big distribution in 2024, for example, can raise your 2026 premiums.

For 2026, single filers with modified adjusted gross income above $109,000 (or $218,000 for joint filers) start paying Part B surcharges that range from an extra $81.20 per month at the first tier up to $487.00 per month at the top tier for income at or above $500,000.¹⁹ Part D has its own surcharges at the same thresholds. Combined, the highest tier adds $578 per month per person.

Qualified Roth distributions don’t count toward the income figure Medicare uses, and neither do qualified charitable distributions from a Traditional IRA. Timing and sizing Traditional withdrawals with these thresholds in view can prevent an otherwise routine distribution from pushing you into a surcharge bracket.

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. Questions and Answers on the Net Investment Income Tax
4
Internal Revenue Service. About Form 8606, Nondeductible IRAs
5
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs – Section: Distribution Rules
6
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
7
Internal Revenue Service. Instructions for Form 5329
8
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
9
Internal Revenue Service. Notice 2024-55 – Certain Exceptions to the 10 Percent Additional Tax
10
Internal Revenue Service. Substantially Equal Periodic Payments
11
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans – Section: Required Distributions
12
Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
13
GovInfo. 26 CFR 54.4974-1 – Excise Tax on Accumulations in Qualified Retirement Plans
14
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts – Section: Distributions for Charitable Purposes
15
Internal Revenue Service. Pensions and Annuity Withholding
16
Internal Revenue Service. 2026 Form W-4R
17
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
18
Internal Revenue Service. Retirement Topics – Beneficiary
19
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles