Taking a cash distribution from your IRA can trigger income tax, an early-withdrawal penalty, or both—depending on the type of IRA, your age, and whether the distribution is qualified. This article walks through how each type of IRA is taxed, the Roth IRA ordering rules with examples, and how to choose your tax withholding.
When you take a cash distribution from your IRA, you may owe income taxes on some or all of the amount you withdraw. The type of IRA you have—and the type of money inside it—determines what you owe.
Regardless of your withholding election, we report your distribution to the Internal Revenue Service (IRS) on Form 1099-R.
You generally owe income tax on pre-tax distributions from a traditional IRA or Simplified Employee Pension (SEP) IRA—unless you roll the money over into another qualified retirement account.
If you take a distribution before age 59½, you may also owe a 10% early-withdrawal penalty tax unless an exception applies.
Roth IRA distributions are more nuanced. Your contributions (the money you personally put in) are always tax- and penalty-free. However, earnings and conversion amounts may be taxable depending on when you withdraw them and whether the distribution is qualified.
Important: A qualified distribution is one that’s taken after you reach age 59½ (or due to disability or death) and at least five tax years after your first Roth IRA contribution. Qualified distributions are entirely tax- and penalty-free.
If your distribution is non-qualified, the IRS uses ordering rules to determine which portion of the withdrawal is subject to taxes or penalties.
Roth 401(k) distributions do not follow the same ordering rules. Roth 401(k) distributions are always a pro-rata portion of contributions and earnings. The ordering rules described in this article apply only to Roth IRAs.
You cannot choose whether your distribution comes from contributions or earnings. Instead, the IRS applies a set hierarchy across all of your Roth IRA accounts—even if they are at different financial institutions.
Here is the order the IRS applies:
Contributory basis (your personal contributions): This is the total amount you have contributed to any Roth IRA over the years. It is always distributed tax- and penalty-free. Amounts you rolled over from a designated Roth account in an employer-sponsored plan are also included here. If that rollover would have been a qualified distribution at the time, the entire amount (including earnings) counts as a contributory basis. If it would not have been qualified, only the contribution portion counts—the earnings portion is treated as Roth IRA earnings.
Conversion amounts, starting with the oldest year first: The next portion comes from any conversions you made from non-Roth accounts (like a traditional IRA or 401(k)).
Taxable at the time of conversion: Always distributed tax-free. However, if the distribution is not qualified and fewer than five years have passed since the conversion, the 10% early-withdrawal penalty may apply unless an exception applies.
Not taxable at the time of conversion: These are typically non-deductible traditional IRA contributions or after-tax 401(k) amounts. Always distributed tax- and penalty-free.
Earnings: Distributed last. If the distribution is not qualified, earnings are subject to income tax and the 10% early-withdrawal penalty unless an exception applies. If the distribution is qualified, earnings are tax- and penalty-free.
Important: These ordering rules apply across all of your Roth IRAs combined. You cannot avoid them by holding contributions and conversions in separate accounts.
Because Roth IRAs are individual accounts, you are responsible for tracking what portion falls into each ordering category. Financial institutions holding your assets are not required to make this determination. Since the IRS aggregates all Roth IRAs for ordering rule purposes, your financial institutions often do not have the full information needed.
Pro tip: Keep a running record of your annual contributions, conversions, and rollovers. This makes tax filing easier and helps you understand the impact of any distribution.
Because Roth IRA ordering rules can be complex, here are a few examples to help illustrate how they work.
Tegan is 36 years old, does not have a penalty exemption, and has one Roth IRA that has been open since 2012.
$8,000 annual contributions
$2,000 earnings
Tegan takes a $9,000 distribution. Applying the ordering rules:
Contributory basis: $8,000—tax- and penalty-free
Conversion amounts: none in the account
Earnings: $1,000—included in taxable income and subject to the 10% early-withdrawal penalty
Result: Of the $9,000, $1,000 is taxable income and subject to the penalty. $1,000 in earnings remains in the account.
Vislor is 60 years old and has two Roth IRAs. The first one was opened in 2018.
Roth IRA A: $2,000 contributions, $300 earnings
Roth IRA B: $6,000 contributions, $1,700 earnings
Vislor takes a $9,000 distribution. It does not matter which account the distribution comes from—all Roth IRAs are treated as one.
Combined totals: $8,000 contributions, $2,000 earnings.
Applying the ordering rules:
Contributory basis: $8,000—tax- and penalty-free
Conversion amounts: none in the account
Earnings: $1,000—this would normally be taxable, but the distribution is qualified because Vislor is over age 59½
Result: The entire $9,000 is tax- and penalty-free. $1,000 in earnings remains in the account.
Peri is 52 years old, does not qualify for a penalty exemption, has three Roth IRAs, and made the first Roth IRA contribution in 1998.
Roth IRA A: $7,000 contributions, $5,000 earnings
Roth IRA B: $5,000 taxed conversion (2022), $5,000 untaxed conversion (2022), $18,000 taxed conversion (2023), $2,000 earnings
Roth IRA C: $8,000 basis rollover from a designated Roth (would have been a qualified distribution), $1,000 earnings rollover from a designated Roth (would have been a qualified distribution), $500 earnings
Peri closes Roth IRA B and takes a $30,000 distribution. All three accounts are treated as one.
Combined totals:
$7,000 annual contributions
$5,000 taxed conversion (2022)
$5,000 untaxed conversion (2022)
$18,000 taxed conversion (2023)
$8,000 basis rollover from designated Roth (qualified)
$1,000 earnings rollover from designated Roth (qualified)
$7,500 earnings
Applying the ordering rules:
Contributory basis: $16,000—tax- and penalty-free. This includes the $7,000 in annual contributions and the $9,000 in rolled-over basis and earnings (rolled-over earnings are included because the rollover would have been a qualified distribution).
Conversion amounts (2022):
Taxed conversion: $5,000—tax-free, but subject to the 10% early-withdrawal penalty
Untaxed conversion: $5,000—tax- and penalty-free
Conversion amounts (2023):
Taxed conversion: $4,000—tax-free, but subject to the 10% early-withdrawal penalty
Earnings: none taken—the $30,000 was fully covered by the categories above
Result: None of the $30,000 is included in taxable income, but $9,000 is subject to the 10% early-withdrawal penalty. After the distribution, $14,000 in taxed conversion assets (2023) and $7,500 in earnings remain.
When you withhold tax from a taxable IRA distribution, you’re prepaying income tax. The amount withheld counts as a credit toward your total tax for the year. If you withhold too much, you get a refund after you file your return for that year. If too little tax is withheld, the IRS or a state may assess penalties for underpayment.
Important: Withholding covers income tax only. If you're under age 59½ and no exception applies, a separate 10% additional tax on early distributions may also be due, so factor that in when you choose a withholding rate.
If you have any questions about federal or state withholding related to your IRA distribution, it’s best to consult your tax advisor.
When you take a distribution from your IRA, you pay income tax on the taxable amount unless the distribution meets an exception. Exceptions include:
A direct transfer to another IRA of the same type
A direct rollover of a traditional IRA to a qualified retirement plan
A recharacterization of a contribution
Revoked regular, spousal, and catch-up IRA contributions
A qualified charitable distribution taken on or after attaining age 70½
A qualified HSA funding distribution, which is a once-in-a-lifetime trustee-to-trustee transfer from your IRA to a health savings account
The nondeductible (basis) or rolled-over after-tax portion of a distribution from a traditional IRA
A qualified distribution from a Roth IRA (generally, one taken after age 59½, disability, death, or a first-time home purchase, and at least 5 years after your first Roth IRA contribution)
The default withholding rate for most distributions is 10%. This rate may not fit your tax situation — you can elect a lower or higher rate at the time you request a distribution. When you request a cash distribution, we prompt you to make a withholding election, so you can use the default withholding or make a new election each time.
Some states require state tax withholding on IRA distributions. Certain states set a minimum mandatory withholding amount.
You cannot waive federal withholding if your residence address on file is outside the U.S. — at least 10% will be withheld.
Note: For distributions made on or after January 1, 2026, this rule looks to your residence address, not just to where the payment is sent, so it applies even if you ask for the money to be deposited in the U.S. Withholding also applies if your residence address is in the U.S. but you ask for the payment to be delivered outside the U.S. Military and diplomatic post office addresses outside the U.S. are treated as U.S. addresses for this purpose.
If you’re a nonresident alien, a mandatory 30% withholding rate may apply. A lower rate or an exemption may apply instead if you submit a properly completed Form W-8BEN with your distribution request, and a valid tax treaty rate or exemption exists between the U.S. and your country of residence.
Regardless of your tax withholding election, your IRA distribution will generally be reported to the IRS on Form 1099-R. You’ll receive this form in January of the following year.
Learn more about the forms you may need to file with the IRS.
This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal, and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.