How to Cash Out an IRA: Taxes, Penalties, and Rules

To cash out an IRA, you contact the custodian holding the account, submit a distribution request either online or on a paper form, and choose where the money should go. The paperwork side is quick. The tax side is what costs people. A Traditional IRA distribution gets added to your ordinary income for the year at rates from 10% to 37% in 2026, and if you’re under 59½ the IRS adds a 10% early withdrawal penalty on top.¹ Knowing the bill before you file the form is the difference between a clean withdrawal and an unpleasant surprise next April.

Requesting the Distribution

Most custodians let you request a distribution through their online portal. Log in, find the withdrawal section, and choose either a partial withdrawal or full liquidation. Pick carefully. Selecting full liquidation when you meant to take part of the balance closes the account and creates work you didn’t need.

If your firm still uses paper forms, you can download one from the website, request it by phone, or upload a scanned copy through a secure message center. Whichever route you take, you’ll need to provide the dollar amount, delivery instructions (direct deposit to your bank or a mailed check), and your tax withholding preference.

Have a few things ready before you start:

Your IRA account number and the account type (Traditional, Roth, SEP, or SIMPLE), because each is taxed differently.
A government-issued photo ID and your Social Security number.
Your bank’s routing number and account number if you want direct deposit. Verify each digit; funds sent to a wrong account are painful to recover.

Larger or unusual distributions can trigger an extra step. Custodians commonly require a Medallion Signature Guarantee — a stamp from a bank or credit union verifying your identity — for withdrawals over $100,000, payments to an address different from what’s on file, or wire transfers. Not every bank issues them, so call ahead if your custodian flags the requirement.

Once submitted, expect roughly three to five business days for processing. If your IRA holds stocks, ETFs, or mutual funds, those need to be sold first, and most securities now settle one business day after the trade.² Your custodian confirms by email or account notification once the money moves.

What You’ll Actually Owe on a Traditional IRA

Every dollar you take out of a Traditional IRA gets added to your taxable income for the year. If you funded the account entirely with pre-tax contributions (as most people did), the whole distribution is taxable at your ordinary income rate.

Here is where people get caught. Your custodian withholds 10% for federal taxes by default, and 10% is rarely what you actually owe.³ For 2026, federal rates run from 10% up to 37%.⁴ Say you’re a single filer in the 22% bracket (roughly $50,400 to $105,700 of income) and you take $50,000 out. With only 10% withheld, you’ll owe about $6,000 more when you file. If you’re also under 59½, the 10% penalty adds another $5,000 you didn’t set aside.

You can ask the custodian to withhold more than 10%, or elect no withholding at all on a nonperiodic distribution and cover the tax later yourself.³ State income tax may also apply, from 0% in states with no income tax up to roughly 12% in the highest-tax states.

Roth IRA Withdrawals Follow Different Rules

Roth IRAs are funded with money you’ve already paid tax on, so the IRS treats withdrawals in a specific order: contributions first, then any conversion amounts, then earnings.⁵ Your regular contributions can come out at any age, for any reason, tax-free and penalty-free. You already paid the tax.

Earnings are stricter. To withdraw earnings completely tax-free, two conditions must both be met: you must be at least 59½, and the Roth IRA must have been open for at least five tax years, counted from January 1 of the year of your first Roth contribution.⁵ A distribution meeting both is “qualified” and stays out of your income entirely. Pull earnings before meeting both, and those earnings become taxable and can trigger the 10% penalty.

The 10% Early Withdrawal Penalty

Take money from a Traditional IRA before age 59½ and the IRS charges an additional 10% on the taxable portion, layered on top of the income tax you already owe.⁶ A $30,000 withdrawal carries a $3,000 penalty by itself. SIMPLE IRAs are worse in the first two years of participation, where the penalty is 25%.⁷

The penalty ends at 59½. Before that, several specific situations let you avoid it, but only the 10% add-on — you still owe regular income tax on a Traditional IRA distribution.

Exceptions That Waive the Penalty

Federal law lists a number of circumstances where the 10% penalty doesn’t apply. These cover Traditional, SEP, and SIMPLE IRAs (after the SIMPLE two-year wait), and some apply to Roth earnings too.⁷

Long-standing exceptions include:

First-time home purchase, up to $10,000 lifetime, for buying, building, or rebuilding a first home.⁶
Higher education expenses — tuition, fees, books, required supplies — for you, your spouse, children, or grandchildren at an eligible institution.
Unreimbursed medical expenses above 7.5% of your adjusted gross income.
Health insurance premiums paid after you received unemployment compensation for at least 12 consecutive weeks.
Total and permanent disability, certified by a physician.
Substantially Equal Periodic Payments, a structured series of annual withdrawals calculated with an IRS-approved method. Once started, you must continue for at least five years or until 59½, whichever is later; modifying the schedule early triggers retroactive penalties plus interest.⁶
Amounts the IRS levies directly from your IRA.
Birth or adoption of a child, up to $5,000 per child within one year of the event.
Qualified military reservists called to active duty for at least 180 days.

Newer exceptions added under SECURE 2.0:

Emergency personal expenses: one penalty-free distribution per calendar year, up to $1,000 (or your vested balance minus $1,000 if that’s less), for unforeseeable or immediate financial needs. You can repay within three years, and you can’t take another emergency distribution during that window unless the first one is repaid.⁸
Domestic abuse survivors: up to the lesser of $10,000 or 50% of the account balance, for distributions after December 31, 2023.⁷
Federally declared disasters: up to $22,000 if you sustained an economic loss from a qualified disaster.
Terminal illness, certified by a physician, with no dollar cap.

Claiming an exception often means filing IRS Form 5329 with your return, especially when the distribution code in Box 7 of your Form 1099-R doesn’t already reflect it.⁷ Correct coding is what stands between the IRS recognizing your exception and sending a penalty bill.

If You Change Your Mind: The 60-Day Rollover

If you cash out and then reconsider, you have 60 days from receiving the money to redeposit it into another IRA or eligible retirement plan and avoid the taxes and penalties.⁹ Miss the deadline by a day and the whole amount becomes a taxable distribution. The IRS can waive the 60 days in narrow circumstances outside your control, but that isn’t a plan.

You also only get one indirect rollover — one where the funds pass through your hands — across all your IRAs in any 12-month period. Traditional, Roth, SEP, and SIMPLE IRAs share a single pool for this limit.⁹ Direct trustee-to-trustee transfers don’t count against it, which is why advisors steer clients that way.

One trap if the custodian withheld tax before sending you the check: you have to make up the withheld amount from your own funds to roll over the full distribution. If $50,000 went out and the custodian withheld $5,000, you need to deposit the full $50,000 into the new IRA within 60 days. Deposit only the $45,000 you received, and the $5,000 shortfall becomes a taxable distribution. You’ll recover the withheld $5,000 as a credit when you file.

Reporting the Distribution

By January 31 of the following year, your custodian will send IRS Form 1099-R showing the total distributed, the taxable portion, and how much federal and state tax was withheld.¹⁰ Those figures go on your federal return. The IRS receives a copy of the same form, so leaving the distribution off is a quick way to trigger a notice.

If you qualify for a penalty exception and the Box 7 code on your 1099-R doesn’t reflect it, file Form 5329 to claim the exception. Get the code right, or expect a bill for the 10%.

One Boundary Worth Knowing

Cashing out is different from being forced to take money out. Once you reach age 73, Traditional, SEP, and SIMPLE IRAs require annual withdrawals called required minimum distributions, and the excise tax for missing one is steep. Roth IRAs have no RMDs during the owner’s lifetime.¹¹ If you’re deciding whether to cash out voluntarily, RMDs are a separate track; if you’re already 73, part of your withdrawal decision is being made for you.

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