What Does an IRA Distribution Mean? Taxes, Penalties, and RMDs

An IRA distribution is any withdrawal of cash or investment assets from an Individual Retirement Account for your personal use, and how it’s taxed depends on the account type, your age, and how long the account has been open. Traditional IRA distributions are taxed as ordinary income. Roth IRA distributions can be entirely tax-free if you meet the rules. Withdrawals before age 59½ generally trigger a 10% penalty on top of any income tax, and once you reach 73 the IRS requires you to start pulling money out of traditional accounts each year.

Traditional IRA Distributions Are Taxed as Income

Every dollar you withdraw from a traditional IRA counts as ordinary income in the year you receive it.¹ The IRS treats these withdrawals the same as wages, so a $30,000 distribution stacks on top of whatever else you earned that year and gets taxed at your marginal rate. A large one-time withdrawal can push you into a higher bracket.

If you made nondeductible contributions (after-tax money you didn’t deduct when contributing), only the earnings portion of your distribution is taxable. You’ll file Form 8606 with your tax return to calculate the split between taxable and nontaxable amounts.² Most people who contributed pre-tax don’t need that form; their entire distribution is taxable.

Roth IRA Distributions Can Be Tax-Free

Roth contributions were made with after-tax dollars, so the tax treatment is different. A qualified Roth distribution is completely tax-free when two conditions are met: the account has been open at least five years (counting from January 1 of the tax year of your first Roth contribution), and the distribution happens after you reach 59½, become disabled, go to a beneficiary after your death, or qualify as a first-time homebuyer up to a $10,000 lifetime limit.²

Even when a Roth distribution isn’t qualified, an ordering rule protects most account holders. Your direct contributions come out first, tax-free and penalty-free, because you already paid tax on that money. Only after you’ve withdrawn all contributions do conversions and then earnings come into play.³ Many early Roth withdrawals end up being entirely tax-free in practice, as long as you don’t take out more than you originally contributed.

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 regular income tax.⁴ For traditional IRAs, where the full distribution is usually taxable, this hits hard. On a $20,000 early withdrawal in the 22% bracket, you’d lose roughly $4,400 to income tax plus another $2,000 to the penalty. Nearly a third of the money is gone before you spend a dime.

One case is worse: if you have a SIMPLE IRA and withdraw during the first two years of participation, the penalty jumps to 25%.⁵ The penalty is reported on IRS Form 5329, filed with your return for the year of the distribution.⁶

When the Penalty Doesn’t Apply

Congress has carved out a long list of situations where you can take money before 59½ without the 10% penalty. For traditional IRAs, the distribution is still taxable as income; the penalty is what goes away. The following exceptions apply:⁵

Distributions to a beneficiary after the owner’s death, or to an owner who is permanently disabled.
Up to $10,000 over your lifetime for buying, building, or rebuilding a first home. You qualify as a first-time buyer if you haven’t owned a principal residence in the two years before the distribution.
Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income.
Health insurance premiums paid after receiving unemployment compensation for at least 12 weeks.
Substantially equal periodic payments (sometimes called 72(t) payments) calculated to last for your life expectancy. Once you start, you must continue for at least five years or until age 59½, whichever is later.
Up to $5,000 per child for qualified birth or adoption expenses.
Distributions taken because the IRS levied your retirement account.
Distributions to a qualified military reservist called to active duty.
Up to $22,000 for qualified individuals with economic loss from a federally declared disaster.
Up to the lesser of $10,000 or 50% of the account for a domestic abuse victim, for distributions taken after December 31, 2023.
One emergency personal expense distribution per calendar year, up to the lesser of $1,000 or the vested balance above $1,000, for distributions taken after December 31, 2023.

Required Minimum Distributions at Age 73

The IRS doesn’t let you shelter money from taxes forever. Once you reach age 73, you must start taking Required Minimum Distributions from your traditional IRA each year.⁷ Under SECURE 2.0, this threshold rises to 75 starting in 2033. Roth IRAs have no RMD requirement while the original owner is alive, so assets can remain in the account and continue growing tax-free.

Your RMD is calculated by dividing the account balance as of December 31 of the prior year by a life expectancy factor from IRS tables. Most people use the Uniform Lifetime Table. If your sole beneficiary is a spouse more than 10 years younger, you use the Joint and Last Survivor Table, which produces a smaller required amount.⁷

Your first RMD is due by April 1 of the year after you turn 73. Every subsequent RMD is due by December 31.⁷ The first-year grace period is a trap. If you wait until April, you’ll owe two RMDs in the same calendar year, which can push you into a higher tax bracket. Taking your first distribution by December 31 of the year you turn 73 avoids that doubling up.

If you own multiple traditional IRAs, you calculate the RMD separately for each account but can withdraw the total from any one or any combination of them.⁷ This aggregation rule doesn’t extend to 401(k) or 457(b) plans; those RMDs must come from each plan individually.

Penalties for Missing an RMD

Miss an RMD and you face a 25% excise tax on the shortfall. If you correct the mistake within two years, the penalty drops to 10%. The IRS can waive it entirely if you show the failure was due to reasonable error and you’re taking steps to fix it. File Form 5329 with a letter of explanation attached.⁷ The reasonable-error waiver is granted more often than people expect, so if you genuinely missed a deadline, file for relief rather than just paying.

Distributions From an Inherited IRA

When you inherit an IRA, the rules depend on your relationship to the original owner and when they died. For deaths after 2019, most non-spouse beneficiaries must empty the inherited account by December 31 of the year containing the tenth anniversary of the owner’s death.² If the original owner died in June 2025, the account must be fully distributed by December 31, 2035.

Five categories of eligible designated beneficiaries are exempt from the 10-year deadline and can instead stretch distributions over their own life expectancy:² a surviving spouse, a minor child of the deceased owner (until reaching majority), a disabled individual, a chronically ill individual, and a beneficiary not more than 10 years younger than the deceased.

Surviving spouses have the most flexibility. A spouse can roll the inherited IRA into their own IRA, which resets the RMD clock to their own age 73 threshold. They can also keep it as an inherited account and take distributions based on their own life expectancy.⁸ The rollover option usually works better for a younger spouse who doesn’t need the money yet. Keeping it as an inherited account can help a spouse under 59½ who wants access without the early withdrawal penalty. Anyone who inherited an IRA before 2020 follows the older stretch rules and is not subject to the 10-year requirement.

How to Request a Distribution

Contact your IRA custodian through their online portal, by phone, or by mailing a paper distribution form. You’ll need your Social Security number or taxpayer identification number, the dollar amount or specific shares you want to liquidate, and your bank routing and account numbers for electronic transfer.

If the distribution involves selling investments, trades now settle in one business day under the SEC’s T+1 standard that took effect in 2024.⁹ After settlement, funds typically reach your bank within one to three additional business days by electronic transfer, or you can request a check by mail.

Tax Withholding on the Distribution

Your custodian withholds 10% of the taxable portion of a traditional IRA distribution for federal income tax unless you submit IRS Form W-4R electing a different rate. You can choose any rate from 0% to 100%. Without a submitted form, the 10% default applies automatically.¹⁰ Roth IRA distributions are not subject to mandatory withholding.

That 10% default is a problem for many retirees. If your effective tax rate is higher, the withholding won’t cover your full bill, and the IRS may assess an underpayment penalty on top of what you owe. For a large distribution, raise the withholding rate on your W-4R or make a quarterly estimated tax payment to stay ahead. Some states also require withholding on IRA distributions, with rates varying by state; your custodian’s form will include a state section where applicable.

How Distributions Get Reported to the IRS

Your custodian reports every distribution on Form 1099-R, which you’ll receive by early February of the following year. The form shows the gross amount distributed, the taxable amount, any federal and state tax withheld, and a distribution code in Box 7 identifying the type of withdrawal.¹¹ Code 1 flags an early distribution before 59½, Code 7 indicates a normal distribution after 59½, and Code 4 denotes a death benefit paid to a beneficiary. The custodian assigns the code based on your age and the circumstances; you don’t choose it.

You report the taxable portion on Form 1040. If the entire distribution is taxable, it goes directly on line 4b. If only part is taxable, because of nondeductible contributions or a Roth distribution, you enter the total on line 4a and the taxable portion on line 4b.²

1
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
2
Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
3
Internal Revenue Service. Roth IRAs
4
Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
5
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
6
Internal Revenue Service. About Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
7
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
8
Internal Revenue Service. Retirement Topics – Beneficiary
9
U.S. Securities and Exchange Commission. Shortening the Securities Transaction Settlement Cycle
10
Internal Revenue Service. Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions
11
Internal Revenue Service. Instructions for Forms 1099-R and 5498