Understanding IRA taxes: How are they taxed and when?
A guide to understanding how contributions, withdrawals, rollovers, and inheritance rules impact how IRAs are taxed.
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How are IRAs taxed: Traditional IRA contributions may be deductible, but withdrawals are taxed; Roth IRA contributions use after-tax dollars, but qualified withdrawals are tax-free.
Timing and strategy matter: Required minimum distributions (RMDs), rollovers, and conversions all carry different tax rules that can affect your liability.
Inheritance tax rules may apply: Spousal heirs have the most flexibility, while non-spouse beneficiaries generally must empty inherited IRAs within 10 years under the SECURE Act of 2019.
IRA contributions: Tax implications on traditional vs. Roth IRAs
When saving for retirement with an Individual Retirement Account (IRA), your tax benefits and implications will be determined by the type of account you have — a traditional or Roth IRA. While both account types offer tax advantages, they work in very different ways. Understanding how IRA contributions and withdrawals are taxed can help you decide which one best fits your financial strategy.
Before diving into IRA tax implications, let’s recap how traditional and Roth IRAs differ and what the contribution limits are.
Traditional IRA: Contributions made to traditional IRAs may be tax-deductible in the year you make them, lowering your taxable income in return, but limitations may apply.
Roth IRA: Contributions are made using after-tax dollars, meaning you will not benefit from up-front deductions but rather from tax-free withdrawals in retirement. However, your ability to contribute to a Roth IRA phases out at higher income levels. The complete 2025 income thresholds can be found in our Roth IRA article.
- Contribution limits: The 2025 IRA contribution limits are $7,000 if you’re under age 50 or $8,000 if you’re 50 or older (catch-up contribution included).1 Contribution limits are the same for all IRAs and apply across all IRAs, meaning you can split contributions between a traditional and Roth IRA but cannot exceed the overall cap.
How are IRA withdrawals taxed?
How your IRA withdrawals are taxed is also dependent on the type of IRA.
Traditional IRA: Traditional IRAs are tax-deferred, meaning that since contributions are made with pre-tax dollars, withdrawals taken in retirement will be taxed as ordinary income.
Roth IRA: Roth IRAs are tax-exempt. Post-tax contributions mean that qualified withdrawals in retirement are tax-free. Qualified withdrawals refer to those made after age 59½ or after holding the money in your account for a minimum of five years. The five-year rule starts on January 1 of the tax year you made your first Roth contribution or conversion and applies separately to each Roth conversion.
Theoretically, you can take money early when needed, but knowing how your IRA distributions are taxed is crucial to understanding tax penalties you may face. Both account types are subject to a 10% tax penalty (and potentially local or state income taxes) in the event of early withdrawals, but exceptions may apply. However, this is slightly different for Roth IRAs, since you can take tax-free distributions on contributions, but taking early distributions from earnings will result in the tax penalty.
Taxes on required minimum distributions (RMDs)
Another thing that can influence your retirement withdrawal strategy is required minimum distributions, or RMDs. RMDs begin at age 73 and are the minimum amount of money you need to withdraw from your tax-deferred retirement accounts. Updates in the SECURE 2.0 ACT have made Roth IRAs exempt from RMDs, but they still apply to other IRAs and employer-sponsored retirement plans (like a 401(k)).
The calculation of RMDs you need to make annually depends on your age and the balances of your retirement account at the end of the previous year, and failing to take RMDs can result in a tax penalty. Useful tools like RMD calculators can help you better estimate how much you have to withdraw and may help you better plan your RMD strategies to help minimize your tax liabilities in retirement. RMDs from a traditional IRA will be subject to the same tax implications as withdrawals (i.e., taxed as regular income).
Rollover and conversion tax considerations
IRAs give you the flexibility to transfer funds from one account to another through rollovers and conversions. However, the events may be taxed differently depending on the account type. Here is how they compare:
Tax treatment of rolling over a 401(k) to an IRA: A traditional 401(k) is funded with pre-tax dollars, so rolling it over to a traditional IRA will be a tax-free event. Contributions will continue to grow tax-deferred, but withdrawals in retirement will be subject to ordinary income tax.
Tax treatment of rolling over a 401(k) to a Roth IRA: Rolling over a traditional 401(k) to a Roth IRA is a taxable event. You will need to pay income tax on the entire amount you convert in the year in which you do the rollover, and because the converted amount is added to your taxable income, your marginal tax rate may increase. However, all qualified withdrawals in retirement will be tax-free.
Converting a traditional IRA to a Roth IRA: If you convert a traditional IRA to a Roth IRA, you will owe income tax on the amount converted in the year the conversion is made. This may potentially raise your marginal tax bracket that year, since the converted amount is added to your taxable income, but you will later benefit from qualified tax-free withdrawals in retirement.
Strategies to minimize tax liability during rollovers
While there is no way to avoid taxes for certain rollover events, the following methods can potentially help reduce your tax liabilities:
Request a direct rollover for a 401(k) to a traditional IRA: Asking for your 401(k) funds to be transferred directly to your new IRA custodian can be a simple way to potentially reduce taxes and penalties.
Convert your traditional accounts to a Roth IRA in low-income years: Converting traditional accounts to a Roth IRA during your lower-income years might help you avoid being pushed to a higher tax bracket and can potentially reduce your tax liabilities.
Don’t convert all at once: Spreading your conversion over several years rather than converting a large amount up-front can help you avoid going into a higher tax bracket and help you take advantage of your lower-income years.
Ensure the rollover is tax-free: If you choose to roll over funds from a traditional 401(k) to a traditional IRA, the event is considered tax-free, so you won't trigger any additional taxes that year (unless you make withdrawals).
Research different options: Consider different investment options. A financial advisor can help you explore your choices if you are unsure.
These are just some available strategies, but the best one for you will depend on the types of accounts involved, along with your financial goals and needs. It is important to get informed before making any big financial decisions.
Estate and inheritance rules for IRAs
You may also want to ensure your IRA accounts (and any other retirement accounts) are listed in your estate plan. Taxes on your IRA will not only affect you while you’re alive, but may also impact the beneficiaries or heirs listed on your IRA when you are no longer here.
Consider the following tax rules for beneficiaries and heirs:
Tax implications for spousal beneficiaries of inherited IRAs: Living spouses have the most flexibility, as they can treat the IRA as their own by rolling it into their IRA or simply take withdrawals and leave it as an inherited IRA.
Options for non-spousal beneficiaries of inherited IRAs: Due to the updates in the SECURE Act of 2019, children, relatives, or other heirs of an IRA need to generally follow the 10-year rule, meaning the entire account must be emptied by the end of the 10th year of the original IRA owner’s death.2 Annual RMDs or exceptions may apply in some cases.
Estate tax considerations: The value of an IRA must be included in your taxable estate. Estate taxes, however, generally apply to very large estates (over $13.99 million in 2025),3 but local laws may apply.
Understanding the tax treatment of Roth vs. traditional IRAs is crucial for your inheritance tax considerations. Given the rules above, traditional and Roth IRA tax rules still apply. This means beneficiaries of a traditional IRA will be subject to income tax payments on withdrawals, while beneficiaries of Roth IRAs will have tax-free withdrawals (but still need to follow the 10-year rule).
How to stay informed on IRA tax rules
IRAs can be a useful tool for retirement planning, but understanding the tax implications of the different account types is crucial to help you get the most out of your retirement savings. Here are some ways to help you stay informed:
Resources for tracking changes in IRA tax laws: Use official government resources, like the IRS website, to check for the latest changes and updates.
Importance of consulting with tax professionals: If you need extra assistance, it's recommended to seek professional help. A tax professional or retirement financial advisor can help you resolve complex issues and help you sort out your tax liabilities.
- Utilizing calculators and tools for tax projections: Online tools and calculators, like the IRS tax withholding estimator, can help you better anticipate your tax liabilities and help you make more informed financial decisions.
IRAs can be powerful retirement tools, but the tax rules differ greatly depending on whether you choose a traditional or Roth account. Knowing how contributions, withdrawals, rollovers, and inheritance are taxed can help you minimize liabilities and maximize retirement income. Staying informed and consulting with a tax professional or retirement financial advisor can ensure your strategy works best for your situation.
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FAQs on IRA taxes
How much tax do I pay on an IRA?
Your tax liability depends on the account type. Traditional IRA withdrawals are taxed as ordinary income, while qualified Roth IRA withdrawals are tax-free.
How do I avoid paying taxes on my IRA withdrawal?
With a Roth IRA, qualified withdrawals are tax-free. With traditional IRAs, you can’t avoid taxes entirely, but you may reduce them by timing withdrawals strategically, converting in low-income years, or using deductions.
Do you pay taxes on IRA withdrawals after 65?
Yes, for traditional IRAs — withdrawals are still taxed as income regardless of age. Roth IRA withdrawals remain tax-free if they meet the age (59½+) and 5-year rules.
How much tax do you pay on a $50,000 IRA withdrawal?
It depends on your tax bracket and the IRA type. For a traditional IRA, the $50,000 withdrawal is added to your taxable income and taxed at your marginal rate. With a Roth IRA, a qualified withdrawal of $50,000 would be tax-free.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.