A traditional Individual Retirement Account (IRA) is a way to save money for the future while receiving tax benefits today. You contribute during your working years, allowing your savings to grow over time. However, when you begin taking money out in retirement, those withdrawals are subject to income taxes, meaning you’ll need to pay the IIRS a portion of what you withdraw.
Unlike a Roth IRA, a traditional IRA gives you tax benefits upfront rather than later. Understanding how traditional IRA withdrawals are taxed can help you plan better, avoid penalties, and keep more of your hard-earned savings.
The Basics: How Tax-Deferred Growth Works
When you contribute to a traditional IRA, those contributions may be tax deductible, meaning you can reduce your taxable income for that year.
For instance, if you earn $60,000 and contribute $6,000, you might only owe taxes on $54,000. The IRS lets your contributions and investment growth accumulate tax-deferred, meaning you won’t pay taxes until you take money out.
The tradeoff is that you save now, but pay later when you make withdrawals.
When IRA Withdrawals Become Taxable Income
Withdrawals from a traditional IRA are called distributions, and they’re treated as ordinary income. This means every dollar you withdraw adds to your total income for the year and is taxed at your current rate.
If you live in a state with income taxes, those apply as well.
Example:
Suppose you’re retired, earning $50,000 from Social Security and part-time work, and you withdraw $10,000 from your IRA. The IRS views your taxable income as $60,000. Your tax bracket determines how much you owe.
Because IRA distributions count as income, large withdrawals can push you into a higher tax bracket. A little planning such as spreading withdrawals across multiple years can help you manage that.
Pre-Tax vs. After-Tax Contributions
Not all IRA dollars are taxed the same way. Most traditional IRAs hold pre-tax contributions, meaning you didn’t pay taxes when you deposited the money. However, some people contribute after-tax dollars when they don’t qualify for a deduction.
If your account contains both, you’ll owe taxes only on the portion of your withdrawal tied to pre-tax funds. The IRS uses a pro-rata rule to determine what percentage of your withdrawal is taxable versus nontaxable.
Example:
If 90% of your IRA is from deductible contributions and 10% from nondeductible, then 90% of each withdrawal will be taxable. You’ll track this on IRS Form 8606.
Age 59½: Penalty-Free Withdrawals
Withdraw before that age 59 ½, and the IRS usually tacks on a 10% early withdrawal penalty in addition to regular income taxes. This rule encourages you to keep your savings growing for retirement.
There are exceptions such as using funds for qualified education expenses, a first home purchase (up to $10,000), or certain medical costs, but they’re limited.
Example:
If you withdraw $10,000 at age 45 and you’re in the 22% tax bracket, you’ll owe $2,200 in income tax plus a $1,000 penalty, leaving $6,800 in hand.
Required Minimum Distributions (RMDs)
Eventually, the IRS insists you start withdrawing money and paying taxes. These mandatory withdrawals are called Required Minimum Distributions, or RMDs.
As of 2025, RMDs begin at age 73 for most people born between 1951 and 1959. For younger generations, the starting age will increase to 75.
Your RMD amount depends on your account balance and your life expectancy, according to IRS tables. Miss one, and the penalty can reach 25% of the amount you should have taken (or 10% if corrected quickly).
Strategies to Reduce Taxes on IRA Withdrawals
Helpful advice from the Institute of Financial Wellness suggests to:
1. Spread Out Withdrawals
Taking smaller distributions over several years can help you stay in a lower tax bracket.
2. Balance Income Sources
If you have other retirement income, such as a pension or Social Security, coordinate when you draw from each source. Taking more from your IRA in lower-income years can make sense.
3. Consider a Roth Conversion
If you expect higher tax rates in the future, converting part of your traditional IRA to a Roth IRA could pay off. You’ll pay taxes now, but future qualified withdrawals from the Roth will be tax-free.
4. Make Qualified Charitable Distributions (QCDs)
If you’re 70½ or older, you can donate up to $100,000 annually from your IRA directly to a charity. QCDs count toward your RMD and aren’t included in your taxable income.
Final Thoughts
Understanding how traditional IRA withdrawals are taxed can make a big difference in how far your retirement savings go. Taxes may be unavoidable, but planning when and how you take your distributions helps you manage your income and avoid costly mistakes.
Review your withdrawal strategy each year, stay aware of your tax bracket, and seek professional tax guidance when needed. The more you plan ahead, the more control you’ll have over your retirement income and peace of mind.
