What Is the Tax Rate on IRA Withdrawals?
The tax on IRA withdrawals is based on your ordinary income rate, not a fixed percentage. Learn how the type of IRA and timing affect your tax liability.
An Individual Retirement Arrangement (IRA) is a personal savings plan with tax advantages for retirement, established by individuals through financial institutions. An IRA allows earnings on invested funds to grow without being taxed annually, a feature known as tax-deferred growth. The tax treatment of contributions and withdrawals depends on the type of IRA.
Tax Treatment of IRA Contributions
The tax implications of IRA contributions depend on whether it is a Traditional or Roth IRA. Contributions to a Traditional IRA may be tax-deductible, lowering your taxable income for the year of the contribution. This deduction is contingent on your income and whether you or your spouse are covered by a workplace retirement plan. The IRS provides Modified Adjusted Gross Income (MAGI) phase-out ranges that determine the deduction amount.
For 2025, a single individual in a workplace plan can take a full deduction with a MAGI of $79,000 or less, which phases out completely at $89,000. For married couples filing jointly where the contributing spouse is in a workplace plan, the full deduction is available for a MAGI of $126,000 or less and phases out up to $146,000. If an individual is not covered by a workplace plan but their spouse is, the phase-out range for the deduction is higher. Even if contributions are not deductible, anyone with earned income can contribute to a Traditional IRA up to the annual limit.
Contributions to a Roth IRA are never tax-deductible and are made with after-tax money. Eligibility to contribute is subject to MAGI limitations. For 2025, the contribution eligibility for single filers phases out with a MAGI between $150,000 and $165,000. For married couples filing jointly, the phase-out range is between $236,000 and $246,000. The maximum total contribution for either IRA type in 2025 is $7,000, or $8,000 for those age 50 and over.
Taxation of IRA Withdrawals
The tax rate on IRA withdrawals is determined by the IRA type and your personal income. Distributions from a Traditional IRA are taxed as ordinary income, meaning the amount is added to your other earnings for the year and taxed at your marginal rate. If you made both deductible and non-deductible contributions, a portion of your withdrawal will be tax-free, calculated on a pro-rata basis using IRS Form 8606.
Qualified distributions from a Roth IRA are free from federal income tax. For a distribution to be qualified, two conditions must be met: you must be at least 59½ years old, and the Roth IRA must have been open for at least five years. This five-year period begins on the first day of the tax year for which you made your first contribution.
For instance, if you open and fund a Roth IRA in 2025, the clock starts on January 1, 2025. Withdrawing earnings before meeting both the age and five-year requirements may subject them to income tax and a penalty. Contributions can be withdrawn at any time, tax-free and penalty-free, because they were made with after-tax money.
Penalties and Additional Taxes
IRA withdrawals can be subject to additional taxes for taking money out too early or not taking enough when required. A 10% additional tax is applied to the taxable portion of a distribution from either IRA type if you are under age 59½. This penalty is levied on top of any ordinary income taxes owed on the withdrawal. The purpose of this penalty is to discourage the use of retirement funds for non-retirement purposes.
Several exceptions allow you to avoid the 10% early withdrawal penalty. These exceptions have specific IRS requirements that must be documented on your tax return using Form 5329. Common exceptions include withdrawals for:
- A first-time home purchase, up to a $10,000 lifetime limit
- Total and permanent disability
- Qualifying medical expenses that exceed a percentage of your adjusted gross income
- Health insurance premiums while unemployed
A penalty also applies to Required Minimum Distributions (RMDs). For Traditional IRAs, you must begin taking withdrawals by April 1 of the year after you turn 73. Failure to take the correct RMD amount results in a 25% penalty on the amount that should have been withdrawn. This penalty can be reduced to 10% if the error is corrected in a timely manner.
Tax Implications of IRA Rollovers and Conversions
Moving funds between retirement accounts through rollovers or conversions has distinct tax consequences. A direct rollover of funds from one Traditional IRA to another is a non-taxable event. As long as the money is transferred directly between institutions, no taxes are due because the pre-tax status of the funds is maintained. This allows you to consolidate accounts or change custodians without triggering a tax liability.
A Roth conversion is the process of moving funds from a pre-tax account, like a Traditional IRA, to a post-tax Roth IRA. The entire amount you convert is considered taxable income in the year of the conversion. This amount is added to your other income and taxed at your ordinary income tax rates.
For example, converting $50,000 from a Traditional IRA to a Roth IRA means you must report an additional $50,000 of income on that year’s tax return. This can push you into a higher tax bracket. The decision to convert involves weighing the immediate tax cost against the future benefit of tax-free qualified distributions. The 10% early withdrawal penalty does not apply to the converted amount, regardless of your age.