How Retirement Account Withdrawals Get Taxed

Withdrawals from retirement accounts are taxed as ordinary income, but the amount you owe depends on the account type, your age, and whether you've already paid taxes on that money

The tax you pay on a retirement withdrawal is not a flat rate — it depends entirely on which account the money comes from. A withdrawal from a traditional IRA or 401(k) is taxed as regular income at your current tax bracket. A withdrawal from a Roth IRA, by contrast, may not be taxed at all if you meet certain conditions. The rules also change once you turn 59½, and there are penalties if you withdraw before that age from most accounts.

Understanding which account holds your money is the first step, because the tax treatment is completely different. This matters because taking money from the wrong account can cost you thousands in unnecessary taxes.

Key Takeaways

• Traditional IRA and 401(k) withdrawals are taxed as ordinary income at your current tax rate, and you owe taxes on the full amount you withdraw.
• Roth IRA withdrawals of contributions you already paid taxes on are never taxed again, but earnings withdrawals may be taxed if you withdraw before age 59½ or haven't held the account five years.
• If you withdraw from a traditional account before age 59½, you typically owe a 10 percent penalty on top of income tax, though some exceptions exist.
• The order in which you withdraw from multiple IRAs matters for tax purposes — the IRS treats all your traditional IRAs as one account when calculating taxes.

How traditional IRA and 401(k) withdrawals are taxed

When you withdraw money from a traditional IRA or 401(k), the entire withdrawal is taxed as ordinary income. This means it is added to your other income for the year and taxed at whatever rate applies to your total income. If you are in the 22 percent tax bracket, a $10,000 withdrawal costs you roughly $2,200 in federal income tax, plus any state income tax your state charges.

The reason is straightforward: you got a tax deduction when you contributed the money years ago, so the IRS taxes you when you take it out. You are paying tax on money you never paid tax on before. This applies whether you withdraw $500 or $50,000 in a single year.

Your employer's 401(k) works the same way. The money you contributed came out of your paycheck before taxes were withheld, so withdrawals are fully taxable. If your 401(k) includes employer matching contributions, those are taxable too.

Roth IRA withdrawals and the five-year rule

A Roth IRA withdrawal is taxed differently because you already paid taxes on the money when you contributed it. The IRS divides your Roth account into two parts: contributions (the money you put in) and earnings (the growth on that money).

You can withdraw your contributions at any time, at any age, with no tax and no penalty. If you put $5,000 into a Roth IRA and it grew to $7,000, you can withdraw the $5,000 contribution whenever you want. The $2,000 in earnings is what triggers the rules.

Earnings withdrawals are tax-free only if two conditions are both true: you are at least 59½ years old, and you have held the Roth account for at least five tax years. The five-year clock starts on January 1 of the year you opened the account, not the day you opened it. If you opened a Roth in December 2019, the five years end on January 1, 2025. If you withdraw earnings before meeting both conditions, you owe income tax on the earnings plus a 10 percent penalty.

There are exceptions to the five-year rule for certain situations — disability, medical expenses, first-time home purchase up to $10,000 — but the five-year holding period still applies in most cases.

The 10 percent early withdrawal penalty and exceptions

If you withdraw from a traditional IRA or 401(k) before age 59½, you owe a 10 percent penalty on top of the income tax. A $10,000 withdrawal before 59½ costs you $1,000 in penalty plus income tax. This penalty applies to the amount withdrawn, not to your total account balance.

The IRS does allow some exceptions where you can withdraw early without the 10 percent penalty, though you still owe income tax. These include disability, substantial equal periodic payments (a specific calculation that lets you withdraw a set amount each year), medical expenses over 7.5 percent of your adjusted gross income, health insurance premiums while unemployed, and first-time home purchase up to $10,000 lifetime. Each exception has strict rules about how much you can withdraw and when.

A 401(k) has one additional exception: the "rule of 55" allows you to withdraw penalty-free starting at age 55 if you left that job in or after the year you turned 55. This does not apply to IRAs, and it does not apply to a 401(k) from a previous employer unless you rolled it into the current employer's plan.

Taxes on required minimum distributions

Once you turn 73 (as of 2023), the IRS requires you to withdraw a minimum amount from traditional IRAs and 401(k)s each year. This is called a required minimum distribution, or RMD. The amount is calculated based on your age and account balance, and the IRS publishes tables each year to show you how much.

RMDs are fully taxable as ordinary income, just like any other withdrawal. You cannot avoid the tax by not taking the distribution — if you miss an RMD, you owe a 25 percent penalty on the amount you should have withdrawn (reduced to 10 percent if you correct it within two years). The tax on the RMD itself is separate from this penalty.

Roth IRAs do not require distributions during your lifetime, which is one reason they are valuable in retirement. Your heirs will have to take distributions from an inherited Roth, but that is their tax problem, not yours.

How to calculate taxes on multiple IRA accounts

If you own more than one traditional IRA, the IRS treats them as a single account for tax purposes. This matters if you are trying to withdraw from one IRA while leaving another untouched. You cannot simply withdraw from the IRA with the lowest balance and avoid taxes on the rest.

The rule is called the pro-rata rule. If you have $50,000 in pre-tax money across all your traditional IRAs and $10,000 in after-tax money (money you already paid taxes on), and you withdraw $10,000, the IRS assumes you withdrew $8,000 of pre-tax money and $2,000 of after-tax money, based on the ratio. You owe tax on the $8,000 portion.

This rule does not apply to Roth IRAs — each Roth is separate. It also does not apply to 401(k)s, which are treated separately from IRAs. If you have a 401(k) and an IRA, you can withdraw from one without affecting the tax treatment of the other.

State income tax on retirement withdrawals

Federal income tax is only part of the picture. Most states also tax retirement withdrawals as ordinary income. A few states — including Pennsylvania, Illinois, Mississippi, and Tennessee — do not tax retirement income at all, which is why some retirees move there. Others tax only certain types of retirement income or offer partial exclusions.

Your state's rules depend on where you live when you withdraw the money, not where you lived when you contributed it. If you move to a no-tax state after retirement, you may be able to avoid state tax on future withdrawals, but you will owe state tax on withdrawals taken while you lived in a taxing state.

Frequently Asked Questions

Do I have to pay taxes on my entire 401(k) withdrawal?

Yes, the entire amount is taxed as ordinary income. If you withdraw $20,000 from a traditional 401(k), all $20,000 is added to your income for the year and taxed at your current rate. The only exception is if part of your 401(k) contains after-tax contributions, which are rare.

Can I withdraw from my Roth IRA without paying taxes?

You can withdraw your contributions anytime without tax. Earnings are tax-free only if you are 59½ and have held the account five years. If you withdraw earnings before then, you owe income tax on the earnings plus a 10 percent penalty, unless an exception applies.

What happens if I withdraw before age 59½?

You owe income tax on the withdrawal plus a 10 percent penalty. A $5,000 withdrawal might cost you $1,100 in tax and penalty combined, depending on your tax bracket. Some exceptions exist — disability, medical expenses, and first-time home purchase — but most early withdrawals carry the full penalty.

How do I know what tax bracket my withdrawal puts me in?

Add the withdrawal to your other income for the year and see where the total falls. If you earn $50,000 and withdraw $20,000, your taxable income is $70,000. Use the IRS tax tables for your filing status to find your bracket. Your tax software or a tax professional can calculate this for you.

Do I pay taxes on the money I already paid taxes on in my IRA?

No. If you made after-tax contributions to a traditional IRA, you do not pay tax on that portion again. You will need Form 8606 to track this, and the pro-rata rule means you cannot simply withdraw the after-tax portion first — the IRS assumes you withdraw a proportional mix of pre-tax and after-tax money.