Most IRA distributions are taxed as ordinary income at your full tax rate

When you withdraw money from a traditional IRA, the IRS treats that withdrawal as ordinary income. That means it gets added to your other income for the year — wages, self-employment earnings, interest, and so on — and taxed at whatever rate applies to your total income. If you are in the 22% tax bracket, a $10,000 IRA withdrawal adds $10,000 to your taxable income and costs you roughly $2,200 in federal tax, plus any state income tax your state charges.

Roth IRAs work differently. Withdrawals of money you contributed (not earnings) come out tax-free. Withdrawals of earnings are also tax-free if you meet the age and holding-period rules. But if you take earnings out early or do not meet the holding requirements, those earnings are taxed as ordinary income.

The tax bill arrives when you file your return for the year you took the distribution. The IRA custodian (your bank, brokerage, or IRA provider) will send you a Form 1099-R showing the amount withdrawn, and you report it on your tax return.

Key Takeaways

  • Traditional IRA withdrawals are added to your other income and taxed at your full ordinary income tax rate, which can push you into a higher bracket.
  • Roth IRA contributions can be withdrawn tax-free anytime, but earnings withdrawn before age 59½ or within five years of opening the account are taxed as ordinary income.
  • The IRA custodian reports the distribution on Form 1099-R, and you report it on your tax return when you file.
  • Withdrawals before age 59½ from a traditional IRA are usually subject to a 10% penalty on top of ordinary income tax, with limited exceptions.
  • The amount of tax you owe depends on your total income for the year, not just the IRA withdrawal.

Why traditional IRA withdrawals count as ordinary income

A traditional IRA is funded with money you deducted from your income when you contributed it. The IRS let you avoid paying tax on that money at the time, so it taxes you when you take it out. The withdrawal is treated the same way as wages or salary — it is ordinary income, not capital gains or another category with a lower rate.

This matters because your tax bracket depends on your total income. If you earn $60,000 in wages and withdraw $20,000 from an IRA, you are taxed on $80,000 of income. That extra $20,000 might push you from the 12% bracket into the 22% bracket, meaning you pay the higher rate on at least part of the withdrawal.

If you have both a traditional IRA and a Roth IRA, or if you have a SEP-IRA or SIMPLE IRA from self-employment, the rules are more complex. The IRS requires you to aggregate all your traditional IRAs and treat them as one account for tax purposes, even if you keep them separate at different banks.

How Roth IRA withdrawals are taxed differently

Roth IRAs are taxed in reverse. You fund them with after-tax money — money you already paid income tax on — so withdrawals of your contributions are never taxed again. You can pull out the money you put in at any time, tax-free and penalty-free.

Earnings (the growth on your contributions) are tax-free only if you are at least 59½ years old and have held the Roth for at least five tax years. If you withdraw earnings before meeting both conditions, those earnings are taxed as ordinary income, and you usually owe a 10% penalty as well.

The five-year rule is per Roth account, not per contribution. If you open a Roth IRA in 2024, you must wait until 2029 for the five-year holding period to end, even if you do not contribute every year. If you convert a traditional IRA to a Roth, that conversion has its own five-year clock.

Early withdrawal penalties and the ordinary income tax

If you withdraw from a traditional IRA before age 59½, you owe ordinary income tax on the withdrawal plus a 10% penalty. The penalty is separate from the tax — it is an additional cost on top of what you already owe. A $10,000 early withdrawal in the 22% bracket costs you $2,200 in tax plus $1,000 in penalty, for $3,200 total.

Some withdrawals are exempt from the 10% penalty, though you still owe ordinary income tax. These include withdrawals for a first-time home purchase (up to $10,000 lifetime), medical expenses that exceed 7.5% of your adjusted gross income, health insurance premiums while unemployed, and disability or medical hardship. Even with an exemption, the withdrawal is still taxed as ordinary income.

Roth IRAs have the same 10% penalty on early earnings withdrawals, but contributions can always come out penalty-free. The penalty applies only to the earnings portion, not to your contributions.

How distributions affect your tax bracket and other deductions

Because IRA distributions are ordinary income, they can affect other parts of your tax return. A large withdrawal might push you into a higher tax bracket, which increases the tax rate on all your income in that bracket. It can also reduce or eliminate deductions and credits that phase out based on income, such as the Earned Income Tax Credit, the Child Tax Credit, or the ability to deduct student loan interest.

If you receive Social Security, an IRA distribution can trigger taxation of your benefits. The IRS uses a formula called "combined income" that includes half your Social Security plus all your other income, including IRA withdrawals. If combined income exceeds certain thresholds, up to 85% of your Social Security becomes taxable.

This is why the timing of withdrawals matters. Taking a large distribution in a year when your other income is low costs less in tax than taking it in a year when you have high wages or other income.

Withholding and estimated tax payments

When you take an IRA distribution, the custodian can withhold federal income tax directly from the payment. The default withholding is 10% for most distributions, but you can request a different amount or no withholding at all. If you choose no withholding and owe tax, you may need to make estimated tax payments to avoid an underpayment penalty.

Withholding is not the same as paying your tax bill. If you have $50,000 withheld from an IRA distribution but owe $60,000 in tax, you still owe the remaining $10,000 when you file. If you have $50,000 withheld but owe only $40,000, you get a refund of the extra $10,000.

State income tax is not automatically withheld from IRA distributions in most states. You may owe state tax on top of federal tax, depending on where you live and whether your state taxes retirement income.

Required minimum distributions and ordinary income tax

Once you reach age 73 (as of 2023; this age changes under current law), you must begin taking required minimum distributions (RMDs) from traditional IRAs. The amount is calculated based on your age and account balance, and you must withdraw it each year or face a 25% penalty on the amount you failed to withdraw (reduced to 10% under certain conditions).

RMDs are taxed as ordinary income, just like any other withdrawal. The tax bill is based on the amount you are required to withdraw, not on what you actually need. If your RMD is $30,000 but you only need $10,000, you still owe tax on the full $30,000.

Roth IRAs do not require distributions during the account holder's lifetime, so you can avoid this tax if you have a Roth. Converting a traditional IRA to a Roth before RMDs begin can reduce your future tax burden, though the conversion itself is taxed as ordinary income in the year it occurs.

Frequently Asked Questions

Can I avoid ordinary income tax by taking an IRA distribution as a loan?

No. An IRA loan is not a real loan — it is a distribution. The IRS does not allow true loans from IRAs. If you take money out, it is treated as a withdrawal and taxed as ordinary income, regardless of whether you intend to pay it back. The only exception is a 60-day rollover, which lets you move money between IRAs without tax if you complete the transfer within 60 days.

What if I have both a traditional and a Roth IRA?

Withdrawals from each are taxed separately based on their type. Roth contributions come out tax-free; Roth earnings are taxed as ordinary income if withdrawn early. Traditional IRA withdrawals are always taxed as ordinary income. However, the IRS treats all your traditional IRAs as one account for the pro-rata rule, which can complicate things if you have both deductible and non-deductible contributions.

Do I have to pay tax on an IRA distribution if I roll it over to another IRA?

Not if you complete the rollover within 60 days. A direct transfer between custodians (trustee-to-trustee transfer) is never taxed. An indirect rollover, where you receive the money and deposit it yourself, is tax-free only if you complete it within 60 days and do not mix it with other funds.

Is there a way to reduce the tax on a large IRA withdrawal?

Spreading the withdrawal over multiple years reduces the amount of ordinary income in any single year, which can keep you in a lower tax bracket. You can also time withdrawals to years when your other income is lower. If you are over 70½, you can direct charitable donations from your IRA, which avoids the ordinary income tax on that amount.