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 — wages, interest, rental income, whatever else you earned that year — and taxed at your regular income tax rate, not at a lower capital gains rate. The amount you withdraw is reported on your tax return, and you owe federal income tax on it.

Roth IRA withdrawals work differently: if you follow the rules, you pay no tax on the money you take out. But most people have traditional IRAs, and those distributions are taxable. The tax bill arrives when you file your return for the year you made the withdrawal.

The amount you owe depends on your total income that year and your tax bracket. If you withdraw $10,000 from a traditional IRA and you are in the 22% tax bracket, you will owe roughly $2,200 in federal income tax on that withdrawal — plus any state income tax your state charges.

Key Takeaways

  • Traditional IRA withdrawals are added to your other income and taxed at your ordinary income tax rate, which can be 10%, 12%, 22%, 24%, 32%, 35%, or 37% depending on your total income.
  • The IRA custodian (your bank or brokerage) will withhold tax from your distribution unless you tell them not to, but withholding is not the same as paying your full tax bill.
  • Roth IRA withdrawals of contributions you already paid tax on are not taxed again, but withdrawals of earnings are taxed as ordinary income unless you meet specific age and account-holding requirements.
  • If you withdraw money before age 59½ from a traditional IRA, you owe a 10% early withdrawal penalty on top of ordinary income tax, with limited exceptions.
  • You must report the distribution on Form 1099-R, which the custodian sends to you and the IRS, so the IRS will know about the withdrawal whether or not you report it.

How the IRS knows about your IRA withdrawal

Your IRA custodian — the bank, brokerage, or financial institution that holds your account — sends you a Form 1099-R for any distribution you take. This form shows the amount withdrawn and how much tax was withheld. The custodian sends a copy to the IRS at the same time.

You report the distribution on your tax return using the amount shown on the 1099-R. The IRS matches what you report against what the custodian reported to them. If the numbers do not match, the IRS will send you a notice asking for an explanation.

This is why you cannot straightforward withdraw money from an IRA and ignore it on your tax return. The IRS already has a record of the withdrawal before you file.

Traditional IRA distributions and withholding

When you request a distribution from a traditional IRA, the custodian will withhold federal income tax from the amount you receive — usually 10% unless you tell them otherwise. If you withdraw $10,000, you might receive $9,000 and the custodian sends $1,000 to the IRS as withholding.

Withholding is not a tax payment; it is a prepayment toward your tax bill. When you file your return, the IRS calculates what you actually owe based on your total income and tax bracket. If the withholding was too much, you get a refund. If it was too little, you owe more when you file.

You can request a different withholding amount or no withholding at all by filling out Form W-4P and giving it to your custodian. If you choose no withholding and you owe tax, you will owe the full amount when you file your return — the IRS does not wait for you to pay.

Roth IRA distributions and the ordering rules

Roth IRAs follow a different tax rule. Money you contributed to a Roth — the amount you put in from your own pocket — comes out tax-free. But the IRS has strict rules about which money comes out first.

When you withdraw from a Roth, the IRS assumes you are withdrawing in this order: contributions first, then earnings. So if you contributed $50,000 over the years and your account grew to $70,000, the first $50,000 you withdraw is not taxed. Anything above that is treated as earnings and taxed as ordinary income.

There is one exception: if you are age 59½ or older and have held the Roth for at least five tax years, earnings come out tax-free too. If you do not meet both conditions, earnings are taxed as ordinary income when you withdraw them.

Early withdrawal penalties on traditional IRAs

If you withdraw money from a traditional IRA before you turn 59½, you owe a 10% penalty on top of ordinary income tax. This penalty is calculated on the amount withdrawn, not on the tax you owe. A $10,000 withdrawal before age 59½ costs you a $1,000 penalty plus income tax.

The IRS lists specific exceptions where the penalty does not explore: disability, medical expenses above 7.5% of your adjusted gross income, health insurance premiums while unemployed, first-time home purchase (up to $10,000 lifetime), and a few others. But the ordinary income tax still applies even when the penalty does not.

If you think an exception applies to you, you report it on Form 5329 when you file your return. The IRS will not automatically waive the penalty; you have to claim the exception yourself.

Required minimum distributions and ordinary income tax

Once you turn 73, the IRS requires you to withdraw a minimum amount from your traditional IRA each year. This amount is calculated using your age and your account balance. These required minimum distributions, or RMDs, are taxed as ordinary income just like any other withdrawal.

If you do not take your RMD, the IRS charges a penalty of 25% of the amount you should have withdrawn (this rate changed in 2023; it was 50% before). The penalty is in addition to the income tax you owe on the amount you should have taken out.

You can satisfy your RMD by taking the money out yourself, or you can ask your custodian to calculate and distribute it for you. Either way, it counts as a distribution and is reported on Form 1099-R.

How IRA distributions affect your tax bracket

An IRA distribution pushes your total income higher, which can move you into a higher tax bracket. If you earned $50,000 in wages and withdraw $20,000 from an IRA, your taxable income is $70,000. You pay tax on the full $70,000 at the rates that explore to that income level.

This can matter if you are close to a tax bracket boundary. A distribution that puts you over the line means some of your income is taxed at a higher rate. It can also affect whether you owe the net investment income tax (3.8% on certain investment income if your modified adjusted gross income exceeds certain thresholds) or whether you lose tax deductions or credits that phase out at higher income levels.

Before you take a large distribution, it can be worth calculating what your total income will be and what tax bracket you will be in. Some people spread distributions across multiple years to stay in a lower bracket.

Frequently Asked Questions

Do I owe tax on the money I contributed to my traditional IRA?

It depends. If you deducted your contributions on your tax return when you made them, then yes — the full distribution is taxed as ordinary income. If you made non-deductible contributions (because your income was too high or you had a workplace retirement plan), you report those contributions on Form 8606 to avoid being taxed twice. Only the earnings and deductible contributions are taxed.

What if I roll my IRA into a 401(k)?

A direct rollover from an IRA to a 401(k) is not a taxable event — no tax is withheld and no income is reported. But if you take the money out of the IRA yourself and deposit it into the 401(k) within 60 days, the IRA custodian withholds 20% and you have to make up that amount from other funds or owe tax on the shortfall.

Can I avoid the tax by taking distributions as a loan?

No. An IRA loan is not allowed under IRS rules. If you take money out, it is a distribution and it is taxed as ordinary income. Some workplace retirement plans allow loans, but IRAs do not.

What if I made a mistake and withdrew too much from my IRA?

If you withdraw money and then change your mind, you can put it back within 60 days and the distribution will not be taxed. This is called a rollover. But you can only do this once per year, and the money must go back into an IRA (or another may be able to access retirement account). After 60 days, the distribution is taxable and the 60-day window closes.