What Are the Tax Implications for Withdrawing From Your IRA?

There are tax implications that apply when withdrawing money from an individual retirement account (IRA). IRAs, whether traditional or Roth, offer unique tax advantages that can significantly impact long-term savings. However, understanding how the taxation of withdrawals, when penalties apply and the strategic maneuvers available to minimize financial strain is essential.

A financial advisor can help you structure your retirement account withdrawals and build an income plan for your golden years.

How Are IRA Withdrawals Taxed?

IRA withdrawals are subject to specific tax rules that vary depending on the account holder’s age and the type of IRA.

Generally, if you withdraw funds from your IRA before reaching the age of 59 ½, you will not only be taxed at your ordinary income rate but also incur a 10% early withdrawal penalty. ¹ This stringent IRS measure is in place to discourage the use of these funds for purposes other than retirement. 

You can see how an IRA withdrawal might affect your tax liability using our income tax calculator:

Once you surpass the age threshold of 59 ½, withdrawals from traditional IRAs are taxed as ordinary income without additional penalties. This system underscores the government’s intent to support retirement security by ensuring you use these funds for their intended purpose.

To clarify, the ordinary income rate is the tax rate you pay on your regular earnings. This varies based on your total taxable income and federal income tax bracket.

2026 Federal Income Tax Brackets ²

Traditional IRAs vs. Roth IRAs

The taxation of withdrawals from traditional and Roth IRAs starkly differs, reflecting the unique tax treatment of each account type.

For traditional IRAs, withdrawals are taxed at the account holder’s current income tax rate. This is because contributions to traditional IRAs typically use pre-tax dollars, deferring tax until withdrawal. 

Conversely, Roth IRAs are funded with after-tax dollars. As a result, withdrawals made after age 59 ½ are tax-free, provided it’s been at least five years since the person’s first Roth contribution. This requirement is the five-year rule. 

Early Withdrawal Penalty

To discourage savers from accessing retirement funds early, the IRS typically charges a 10% penalty on IRA withdrawals taken before age 59 ½. 

For example, if a teacher decides to retire early at age 49 and withdraws $50,000 from their traditional IRA, the withdrawal would not only be subject to their current income tax rate but also an additional $5,000 penalty. 

The early withdrawal penalty applies somewhat differently to Roth IRAs. Since Roth contributions use after-tax dollars, Roth account owners can make tax- and penalty-free withdrawals of their contributions at any time.

However, thanks to the five-year rule, the earnings on these contributions are subject to taxes and penalties if you withdraw them early. 

Exceptions to the Early Withdrawal Penalty

The IRS recognizes that life’s unpredictable nature sometimes necessitates access to these funds sooner.

As such, it has established several exceptions to this early withdrawal penalty.

• Buying a home. The IRS allows qualified homebuyers who have not owned a home in the previous two years to withdraw up to $10,000 from their IRAs early and use the money to purchase a home. 
• Birth or adoption. The IRS permits an early withdrawal of up to $5,000 from an IRA to pay for qualified birth or adoption expenses. This exemption applies per parent, allowing a couple to withdraw a combined total of $10,000 if both are eligible IRA holders. 
• Death. Beneficiaries may make withdrawals from the inherited IRA without facing early withdrawal penalties.
• Disability. The IRS also provides an exemption from the early withdrawal penalty for IRA holders with a total and permanent disability. 
• Domestic abuse. Victims of domestic abuse can withdraw up to $10,000 or 50% of their IRA account balance, whichever is less, without an early withdrawal penalty. This exception applies to distributions after Dec. 31, 2023.
• Education expenses. You may make early IRA withdrawals for qualified education expenses. This includes tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible educational institution. 
• Emergency personal expense. The IRS permits a withdrawal of up to $1,000 or the vested account balance over $1,000, whichever is less, to cover emergency personal expenses. This includes immediate, substantial financial needs, such as those arising from natural disasters or other unforeseen life events.
• Substantially equal periodic payments. For those needing regular access to their IRA funds before age 59 ½, the IRS offers the option of substantially equal periodic payments (SEPPs) ³ . This involves taking early withdrawals using an IRS-approved calculation for 5 years or until the account holder reaches age 59 ½, whichever is longer. 
• Medical expenses. The IRS allows for penalty-free withdrawals from an IRA to cover unreimbursed medical expenses that exceed 7.5% of an individual’s adjusted gross income (AGI).
• Unemployed health insurance. Penalty-free withdrawals also cover health insurance premiums for individuals who have been unemployed for at least 12 weeks and have received unemployment compensation. 
• Military service. Qualified reservists on active duty can make penalty-free early withdrawals.

These exceptions provide financial relief under specific circumstances without the additional burden of penalties that can exacerbate financial strain.

To find out what exemptions you might be able to qualify for, talk to a financial advisor or tax professional.

Impact on Social Security Benefits

Withdrawing from your IRA can also impact your Social Security benefits. If your combined income, including IRA withdrawals, exceeds certain thresholds, a portion of your Social Security benefits may be taxable. ⁴

In 2026, for example, if an individual’s combined income is between $25,000 and $34,000, up to 50% of their Social Security benefits may be taxable. For married couples filing jointly, the income limit is $32,000 to $44,000. If your income exceeds these amounts, up to 85% of your benefits could be taxable.

This is why strategic planning of IRA withdrawals is essential to avoid taxes on Social Security benefits. The timing and amount of withdrawals need careful consideration to optimize tax liability.

Avoiding Taxes on IRA Withdrawals

Several strategies can help avoid taxes on IRA withdrawals, potentially enhancing financial outcomes for retirees.

Roth IRA Contributions

One effective strategy is making contributions to a Roth IRA. These after-tax contributions allow for tax-free growth and withdrawals under certain conditions.

This can be particularly beneficial for those expecting to be in a higher tax bracket during retirement. 

Roth Conversion

Another strategy is executing a Roth conversion early in life, which transfers funds from a traditional IRA to a Roth IRA. Although this incurs taxes at the time of conversion, it allows for tax-free qualified withdrawals in the future.

Just keep in mind that Roth conversions are subject to their own version of the five-year rule. You can withdraw converted balances, but the principal is subject to the early withdrawal penalty if you are under 59 ½. 

Qualified Charitable Distributions

Additionally, individuals who are 70 ½ or older can make qualified charitable distributions (QCDs) directly from their IRA to a charity.

In 2026, you can make QCDs of up to $111,000. For those 73 or older, QCDs can count toward their required minimum distributions (RMDs), reducing or eliminating the tax burden on these mandatory withdrawals.

Required Minimum Distributions and What Happens If You Miss One

Starting at age 73, the IRS requires traditional IRA holders to withdraw a minimum amount from their accounts each year.

These required minimum distributions exist because the government gives a tax break at the time of contribution. It is now time to collect taxes on that money during your lifetime rather than letting it sit untouched indefinitely. Roth IRAs are not subject to RMDs during the original owner’s lifetime, which is one of the reasons they are often favored for long-term tax planning.

You can calculate the amount you must withdraw each year by dividing your account balance at the end of the previous year by an IRS life expectancy factor. At 73, the factor is relatively large, so the required withdrawal is a modest percentage of the account.

As you age, however, the factor shrinks, and the percentage grows. That means RMDs tend to get bigger over time, and so does the tax bill that comes with them.

Missing an RMD is one of the more expensive mistakes a retiree can make. The penalty used to be 50% of whatever you failed to withdraw, but under the SECURE 2.0 Act, that rate was brought down to 25%.

There is also a provision that lowers it even further to 10% if you correct the error within a two-year window. Even at the reduced rate, forgetting to take a distribution from a $500,000 IRA could cost thousands of dollars in penalties alone, on top of the taxes owed on the withdrawal itself.

RMDs are subject to ordinary income tax, and they stack on top of everything else you earn or receive that year. This includes Social Security, pension plans and part-time work. All these income sources can push you into a higher tax bracket and, in turn, increase the taxable portion of your Social Security benefits. For retirees who do not actually need the RMD money to live on, this can stick you with a tax bill you would rather avoid.

How to Reduce Tax Liability

One way to reduce the impact of future RMDs is to shrink the traditional IRA balance before they begin. Converting some or all of a traditional IRA to a Roth IRA in the years before age 73 can be an effective retirement tax strategy. It moves money out of the account that will eventually be subject to RMDs and into one that will not.

You pay taxes on the conversion in the year it happens, but the tradeoff is a smaller required withdrawal down the road. This can translate to potentially lower taxes over the full course of retirement. This works best when your income is temporarily low, such as in the early years after retiring but before Social Security and RMDs kick in.

RMDs are easy to overlook in the broader conversation about IRA taxes because they feel like a future problem. However, for anyone with a sizable traditional IRA balance, they are one of the largest recurring tax obligations in retirement.

Knowing ahead of time when RMDs start, how much they are and how to manage them is worth building into any withdrawal plan early rather than waiting until the first one is due.

Bottom Line

Understanding the taxation and penalty rules for IRA withdrawals is essential for effective retirement planning and financial stability. While withdrawals from a traditional IRA are typically subject to ordinary income tax rates, taking money out of your account before age 59 ½ can trigger an additional 10% penalty. Roth IRA withdrawals, meanwhile, aren’t taxed if you meet certain conditions. By leveraging the benefits of these accounts, you can make informed decisions that optimize their financial outcomes while avoiding unnecessary penalties. 

Tax Planning Tips

• A financial advisor with tax planning expertise can be a valuable resource, whether you’re looking for tax savings in a given year or need a long-term plan for keeping your taxes as low as possible. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you have a pre-tax retirement account, it’s important to understand how required minimum distributions (RMDs) work and plan accordingly for them. These mandatory withdrawals, which start at age 73 (age 75 for people who turn 74 after Dec. 31, 2032), will add to your taxable income and can potentially push you into a higher tax bracket. Roth accounts, however, are not subject to RMDs so doing a series of Roth conversions can help you avoid the tax implications of these required distributions.

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