IRA Withdrawal Tax Rules, Penalties, and Exceptions

Traditional IRA Withdrawals: Fully Taxable

Every dollar you withdraw from a traditional IRA is taxable as ordinary income in the year you take it. This applies whether you're 35 or 75. The tax deferral doesn't disappear — it simply delayed the taxation until withdrawal.

Because IRA contributions were made with pre-tax dollars (or deducted from taxable income), the full withdrawal amount is added to your taxable income for the year. Large withdrawals in a single year can push you into a higher bracket.

Exception for non-deductible contributions: If you ever made non-deductible IRA contributions (Form 8606 tracks these), those dollars have already been taxed. Each withdrawal recovers some of that basis tax-free, calculated using the pro-rata rule across all your traditional IRA balances.

Use the IRA Withdrawal Tax Calculator to see your exact tax bill before you withdraw.

Roth IRA Ordering Rules

Roth IRA withdrawals follow a strict ordering rule that determines what portion is taxable and penalized:

Layer 1 — Regular contributions: Always withdrawn first. Always tax-free and penalty-free regardless of age or how long the account has been open.

Layer 2 — Conversion amounts: Withdrawn second, in the order they were converted (oldest first). Not taxable (already taxed at conversion), but may be subject to the 10% penalty if within 5 years of the conversion and you're under 59½.

Layer 3 — Earnings: Withdrawn last. Subject to both income tax and the 10% penalty unless the distribution is qualified.

What makes a Roth distribution qualified (and 100% tax-free):

• You are age 59½ or older, AND
• The Roth IRA has been open for at least 5 years (starting January 1 of the year of first contribution to any Roth IRA)

Or you meet another qualifying exception (death, disability).

The Five-Year Rule in Detail

The five-year rule is a source of significant confusion:

Rule 1 — For qualified distributions: Your Roth must have been open for at least 5 tax years for earnings to be tax-free. This clock starts January 1 of the year you first contributed to any Roth IRA, not the year a specific account was opened. If you opened your first Roth IRA in 2020, the five-year clock elapsed January 1, 2025.

Rule 2 — For conversions: Each Roth conversion starts its own 5-year clock for the purpose of penalty-free access to that converted amount. If you're under 59½ and withdraw a conversion within 5 years, you owe the 10% penalty (but no income tax, since it was already taxed).

Rule 3 — For inherited Roth IRAs: Beneficiaries use the decedent's five-year clock if it's already started.

The 10% Early Withdrawal Penalty

Taking money from a traditional IRA before age 59½ triggers a 10% penalty on the entire withdrawal in addition to ordinary income tax. On a $20,000 withdrawal in the 22% bracket, that's $4,400 in income tax plus a $2,000 penalty — an effective 32% cost.

The penalty applies to the taxable portion of the withdrawal. For Roth IRA earnings taken before the account is qualified, the same 10% penalty applies.

All Exceptions to the 10% Penalty

The IRS provides a comprehensive list of circumstances that waive the 10% early withdrawal penalty. Income tax still applies unless another provision eliminates it.

SIMPLE IRA warning: If you're in the first two years of participation in a SIMPLE IRA, the penalty is 25% — not 10%. This resets to 10% after two full years of plan participation.

Substantially Equal Periodic Payments (72t/SEPP)

The 72(t) SEPP strategy lets you take penalty-free distributions from an IRA before 59½ by committing to a series of substantially equal payments based on your life expectancy. Three IRS-approved calculation methods exist:

• Required Minimum Distribution method: Recalculated each year; tends to produce smaller payments
• Fixed amortization: Payments fixed for life; produces larger payments
• Fixed annuitization: Uses an annuity factor; also produces larger fixed payments

Once started, SEPP payments must continue for at least 5 years or until age 59½, whichever is later. Modifying or stopping payments before the schedule ends reinstates the 10% penalty on all prior payments, retroactively. This is a serious commitment.

Required Minimum Distributions: Age 73

Beginning at age 73, the IRS requires you to take minimum distributions from traditional IRAs (and other pre-tax retirement accounts). RMDs are calculated annually:

RMD = Prior year-end account balance ÷ Life expectancy factor (IRS Publication 590-B)

Key RMD rules:

• First RMD can be delayed until April 1 of the year after you turn 73 — but you'll take two RMDs that year
• RMDs are taxable as ordinary income
• Missing an RMD triggers a penalty of 25% of the amount not taken (reduced to 10% if corrected within two years)
• Roth IRAs do NOT have RMDs during the original owner's lifetime

RMDs and Social Security: RMD income increases your provisional income, which can make more of your Social Security benefit taxable. Doing Roth conversions in your 60s (before RMDs begin) is a common strategy to reduce future RMD size.

Qualified Charitable Distributions (QCDs)

If you're 70½ or older, you can make a Qualified Charitable Distribution (QCD) directly from your IRA to a qualified charity — up to $105,000 per year in 2026. QCDs have unique advantages:

• The distribution is excluded from your taxable income entirely
• It counts toward your RMD for the year
• The exclusion from income is better than a charitable deduction (it reduces AGI, not just taxable income — which helps with IRMAA, Social Security taxation, and ACA subsidies)

QCDs must be sent directly from the IRA custodian to the charity. You cannot receive the money and write a check yourself.

Inherited IRA Rules: The 10-Year Rule

When you inherit an IRA from someone who is not your spouse, the 10-year rule now applies for most beneficiaries under current law. You must withdraw all funds from the inherited IRA by the end of the 10th year after the year of death.

Who qualifies for longer distributions (Eligible Designated Beneficiaries):

• Surviving spouses (can roll over to own IRA)
• Minor children of the deceased (until age 21, then 10-year rule kicks in)
• Disabled or chronically ill individuals
• Beneficiaries not more than 10 years younger than the deceased

All others — including adult children and grandchildren — must empty the inherited IRA within 10 years. Strategic withdrawal timing over the 10 years (rather than all in year 10) can minimize the tax impact.

State Taxation of IRA Income

Most states tax IRA withdrawals as ordinary income, but many offer partial or full exemptions:

• No income tax states: Florida, Texas, Nevada, Washington, Wyoming, South Dakota, Alaska, Tennessee, New Hampshire
• Full exemptions for retirement income: Illinois, Mississippi, Pennsylvania (post-59½)
• Partial exemptions: Many states exempt the first $20,000–$65,000 of retirement income for seniors

State tax planning is particularly relevant for early retirees or those considering relocating before large IRA withdrawals.

How to Minimize Taxes on IRA Withdrawals

Roth conversions before RMDs: Converting traditional IRA funds to Roth in your 60s, when income is lower, fills lower brackets, reduces future RMD size, and creates a larger pool of tax-free retirement income. Model this with the Roth Conversion Calculator.

Use QCDs to satisfy RMDs: If you're charitable, QCDs let you satisfy RMDs entirely tax-free. This is especially powerful for those subject to IRMAA surcharges.

Spread withdrawals across years: Large single-year withdrawals push you into higher brackets. A $200,000 withdrawal in one year taxes more at the top rate than four $50,000 withdrawals over four years.

Tax-loss harvesting in taxable accounts: Offsetting capital gains with losses in taxable accounts can create room to take larger IRA withdrawals without increasing your total tax bill.

Related tools: IRA Withdrawal Tax Calculator | Roth Conversion Calculator | 401(k) Rollover Calculator