IRA Distributions

Any amount paid or distributed from a traditional IRA is includible in the gross income of the recipient in the year received, subject to the rules below based on how contributions were made.

Distributions from IRAs funded entirely with tax-deductible contributions (traditional, SEP-IRAs, or SIMPLE IRAs) are fully taxable as ordinary income. Because taxes were never paid on either the contributions or the earnings, the entire amount distributed is subject to income tax in the year of receipt. There is no basis to recover.

Contributions to nondeductible IRAs are made with after-tax dollars. When withdrawn, a portion of each distribution represents a tax-free return of those after-tax contributions. Only the earnings portion is taxable as ordinary income.

The non-taxable portion of each distribution is determined using the exclusion ratio:

To ensure that IRA assets are eventually used for retirement income (not indefinitely accumulated), traditional IRA owners must begin taking required minimum distributions (RMDs) by the applicable deadline.

After the first RMD (which may be delayed to April 1 of the following year), all subsequent RMDs must be taken by December 31 of each year. Delaying the first RMD to April 1 means two distributions will be taxable in that second year.

Each year's RMD is calculated by dividing the prior December 31 account balance by the applicable life expectancy factor from the IRS Uniform Lifetime Table (or the Joint and Last Survivor Table if the sole beneficiary is a spouse more than 10 years younger).

The penalty for failing to take the full required minimum distribution was reduced by SECURE Act 2.0 from 50% to 25% of the shortfall. The penalty is further reduced to 10% if the missed RMD is corrected within the two-year correction window and the tax return for that year has not yet been filed.

To discourage IRA holders from liquidating retirement savings before retirement, the IRS imposes a 10% penalty tax on most distributions taken before the IRA owner reaches age 59½, in addition to ordinary income tax. Once the owner reaches age 59½, withdrawals are simply taxed as ordinary income with no penalty.

• Death or permanent disability of the IRA holder
• Substantially equal periodic payments (SEPPs) over the participant's lifetime or life expectancy (IRC §72(t) distributions)
• Unreimbursed medical expenses exceeding 7.5% of adjusted gross income
• Transfer pursuant to a divorce or separation agreement (qualified domestic relations order equivalent)
• Qualified reservist distributions

In addition to the general exceptions, the following are unique to IRAs:

• Qualified higher education expenses for the taxpayer, spouse, children, or grandchildren
• First-time homebuyer expenses (lifetime maximum of $10,000 from all IRAs combined)
• Health insurance premiums paid while unemployed (after receiving unemployment compensation for 12+ consecutive weeks)
• IRS levy on the IRA account

• Terminal illness — distributions to a terminally ill individual (physician-certified life expectancy of 84 months or less)
• Domestic abuse — up to $10,000 (indexed for inflation) within one year of abuse by a spouse or domestic partner
• Emergency personal expenses — up to $1,000 per year for unforeseeable personal or family emergency expenses (one distribution per year; must be repaid before another can be taken)
• Federally declared disasters — up to $22,000 per disaster
• Long-term care insurance premiums (effective 2026)

All distributions from an inherited IRA (in excess of any nondeductible contributions) are taxable in the year the beneficiary receives them. Distribution rules following the owner's death depend on who is named as beneficiary and when the owner died relative to their RMD start date. (See also: IRA Beneficiaries for complete post-death distribution rules.)

A surviving spouse named as sole beneficiary may:

• Roll the IRA into their own IRA — delaying RMDs until the spouse reaches their own applicable RMD age (73 or 75). The spouse may name new beneficiaries.
• Remain as beneficiary of the inherited IRA — taking life-expectancy distributions, with the ability to delay until the year the deceased would have reached their RMD age.
• Take a lump-sum distribution — fully taxable as ordinary income.

Most non-spouse beneficiaries are subject to the SECURE Act 10-year rule: the entire inherited IRA must be distributed by the end of the 10th year following the year of the owner's death. Whether annual distributions are required during the 10-year period depends on whether the owner had begun RMDs. See IRA Beneficiaries for the complete framework including Eligible Designated Beneficiaries who may use life-expectancy distributions.

If a beneficiary inherits an IRA from an owner who had a cost basis (due to nondeductible contributions), that basis carries over to the inherited IRA. Unless the beneficiary is the surviving spouse who elects to treat the IRA as their own, the beneficiary cannot combine this inherited basis with their own IRA basis. If the beneficiary takes distributions from both an inherited IRA and their own IRA in the same year, and both have cost basis, the taxable and non-taxable portions must be calculated separately for each.

Distributions from SIMPLE IRAs are generally taxed like distributions from traditional IRAs, with one important distinction regarding the premature distribution penalty:

• During the first two years of participation in a SIMPLE IRA, premature distributions (before age 59½) are subject to a 25% penalty rather than the usual 10%.
• After two years of participation, the standard 10% premature distribution penalty applies.
• The 25% penalty does not apply to distributions made after age 59½, or due to death, disability, or other standard exceptions — regardless of how long the individual has participated.

During the first two years of participation, a SIMPLE IRA may only be rolled over to another SIMPLE IRA. After two years of participation, assets may be rolled over to a regular traditional IRA or another eligible retirement plan without penalty.

IRA custodians are generally required to withhold federal income tax on IRA distributions:

• Periodic distributions (annuities and other recurring payments) — withholding is based on the recipient's marital status and withholding allowances claimed on Form W-4P. Recipients may elect out of withholding.
• Non-periodic distributions (including lump sums) — subject to a flat 10% default withholding rate. Recipients may elect a different withholding amount or elect out entirely.
• Eligible rollover distributions from employer plans — subject to mandatory 20% withholding that cannot be waived. This applies when a distribution is paid directly to the individual rather than transferred trustee-to-trustee.

Recipients who cannot opt out of withholding include those receiving distributions payable outside the United States or its possessions.

IRA rollovers and transfers are tax-free movements of funds from one IRA to another, or from a qualified retirement plan to an IRA. The two methods differ significantly in their mechanics, withholding rules, and frequency limits.

Two conditions must be met for a tax-free indirect rollover:

1. The distributed amount must be redeposited to the new IRA within 60 days of receipt.
2. This type of rollover (IRA → individual → IRA) may occur only once per 12-month period across all of the individual's IRAs in aggregate (not once per account).

The IRS has authority to waive the 60-day deadline in cases of casualty, disaster, or other events beyond the individual's reasonable control. If the amount is not rolled over within 60 days, it is included in gross income for the year of receipt.

• Required minimum distributions
• Substantially equal periodic payments made over a life expectancy or period of 10+ years
• Corrective distributions of excess contributions
• Hardship distributions from 401(k) plans
• IRA assets inherited by a non-spouse beneficiary (surviving spouses may roll over inherited IRAs)

When a qualified plan distributes property other than cash (such as stock), the account holder may roll over the same property into an IRA. The property itself must be redeposited — or, if distributed from an employer plan (not an IRA), the property may be sold and the proceeds rolled over within 60 days.

A conduit IRA is an IRA used to temporarily hold a distribution from an employer plan, with the intent to roll those assets into a new employer's plan at a later date. To preserve the ability to transfer the assets into the new plan, the conduit IRA must contain only assets that originated from the prior employer's plan — no additional IRA contributions may be commingled.

The transfer of an IRA pursuant to a legally binding divorce or separation agreement is not a taxable event. Neither the IRA owner nor the recipient spouse is subject to income tax or the 10% premature distribution penalty upon the transfer of account ownership.

From the date of the transfer, the IRA is treated as the recipient former spouse's own account. The recipient then has full ownership rights, including the ability to name new beneficiaries. Future withdrawals are subject to ordinary income tax in the year of distribution, and distributions before age 59½ are subject to the standard 10% premature distribution penalty.