Traditional IRA taxes work in two directions: you may deduct contributions now, then pay income tax on withdrawals later

A traditional IRA lets you put money in before taxes (or after taxes, depending on your income and workplace plan) and delays the tax bill until you take the money out. The tax treatment depends on whether your contributions were deductible when you made them, your age when you withdraw, and how much you earn that year. Most people pay ordinary income tax on withdrawals at whatever tax bracket they're in when they take the money—not at a special rate.

The core idea is simple: contributions reduce your taxable income now, growth inside the account is never taxed while it sits there, and withdrawals are taxed as regular income later. But the details matter, because the IRS tracks deductible and non-deductible contributions separately, and mixing them changes how much tax you owe on each withdrawal.

Key Takeaways

  • Deductible contributions lower your taxable income in the year you make them, but withdrawals are taxed as ordinary income at your current tax rate.
  • Non-deductible contributions are not taxed again on withdrawal, but you must file Form 8606 with the IRS to prove which contributions were after-tax.
  • Withdrawals before age 59½ are subject to ordinary income tax plus a 10 percent early withdrawal penalty, with limited exceptions like disability or medical expenses.
  • Required minimum distributions (RMDs) begin at age 73 and are taxed as ordinary income; skipping them triggers a 25 percent penalty on the amount not withdrawn.
  • If you have both traditional and Roth IRAs, the IRS treats all your traditional IRAs as one account for tax purposes when calculating how much of a withdrawal is taxable.

Deductible contributions and how they lower your tax bill today

When you contribute to a traditional IRA, you may deduct the full amount from your taxable income that year—but only if you meet the income limits. If you have no workplace retirement plan (like a 401(k)), you can deduct contributions regardless of how much you earn. If you do have a workplace plan, the deduction phases out above a certain income threshold, which varies by year and filing status.

For 2024, the deduction phases out between $77,000 and $87,000 for single filers with a workplace plan, and between $123,000 and $133,000 for married couples filing jointly where the higher earner has a plan. These thresholds change each year. If your income is above the phase-out range, you cannot deduct contributions—but you can still contribute to the account; the contribution just becomes non-deductible.

The deduction appears on your tax return (Form 1040, Schedule 1) and reduces the income you owe tax on. If you're in the 22 percent tax bracket and contribute $7,000, that deduction saves you about $1,540 in federal tax that year. The money grows tax-free inside the account until you withdraw it.

Non-deductible contributions and the Form 8606 requirement

If your income is too high to deduct a contribution, or if you choose to contribute after-tax dollars, that contribution is non-deductible. You still put the money in the account, but you don't get a tax break on the way in. The tradeoff is that you won't pay tax on that portion again when you withdraw it—you've already paid tax on those dollars.

To prove to the IRS that part of your contributions were non-deductible, you must file Form 8606 with your tax return in the year you make the non-deductible contribution. This form tells the IRS the amount and date of the non-deductible contribution. If you don't file it, the IRS assumes all your contributions were deductible, and you'll pay tax twice on the non-deductible portion: once when you earned it, and again when you withdraw it.

Keep copies of Form 8606 for every year you make a non-deductible contribution. The IRS uses this history to calculate your basis—the total non-deductible contributions you've made—so it knows how much of your withdrawals are tax-free.

How withdrawals are taxed: the pro-rata rule

When you withdraw money from a traditional IRA, the IRS doesn't let you choose to take out only the non-deductible contributions first. Instead, it uses the pro-rata rule: withdrawals are treated as a mix of deductible and non-deductible money in the same proportion as your total balance.

For example, suppose you have $100,000 in traditional IRAs across all accounts. Of that, $20,000 came from non-deductible contributions (your basis), and $80,000 came from deductible contributions and growth. If you withdraw $10,000, the IRS says 20 percent of it ($2,000) is non-deductible and 80 percent ($8,000) is deductible. You pay tax on the $8,000 at your ordinary income tax rate; the $2,000 is not taxed again.

This rule applies to all your traditional IRAs combined—if you have an IRA at one bank and another at a different bank, the IRS treats them as a single account for this calculation. Roth IRAs are separate and do not count toward the pro-rata calculation.

Early withdrawals before age 59½ and the 10 percent penalty

If you withdraw money from a traditional IRA before you turn 59½, you owe ordinary income tax on the taxable portion, plus a 10 percent early withdrawal penalty on top. The penalty applies to the amount withdrawn, not to the tax owed. If you withdraw $10,000 at age 45 and $8,000 of it is taxable, you pay tax on $8,000 plus a $1,000 penalty (10 percent of the $10,000 withdrawn).

The IRS does allow some exceptions to the 10 percent penalty—though not to the income tax itself. You can withdraw without penalty if you are disabled, if you have large medical expenses that exceed 7.5 percent of your adjusted gross income, if you are paying health insurance premiums while unemployed, or if you take substantially equal periodic payments (a specific calculation that spreads withdrawals over your life expectancy). A first-time home purchase (up to $10,000 lifetime) is also exempt from the penalty, though not from income tax.

Withdrawals due to death are not penalized, and beneficiaries who inherit an IRA can withdraw without the early withdrawal penalty, though they still owe income tax on taxable portions.

Required minimum distributions starting at age 73

Once you reach age 73, the IRS requires you to withdraw a minimum amount from your traditional IRA each year. This amount is calculated by dividing your account balance on December 31 of the prior year by a life expectancy factor published by the IRS. The calculation is straightforward, but the amount grows as you age because the life expectancy factor decreases.

Required minimum distributions (RMDs) are taxed as ordinary income at your current tax rate. If you don't take the full RMD in a given year, the IRS charges a 25 percent penalty on the amount you failed to withdraw (reduced to 10 percent if you correct the shortfall within two years). This is one of the harshest penalties in the tax code, so it's worth setting a calendar reminder each year.

If you are still working and do not own more than 5 percent of the business where you work, you may be able to delay RMDs from that employer's plan, but this exception does not apply to IRAs. Once you turn 73, RMDs from traditional IRAs are mandatory.

How your tax bracket affects what you actually pay

Traditional IRA withdrawals are taxed as ordinary income, meaning they're added to your other income for the year and taxed at whatever bracket that total puts you in. If you withdraw $50,000 from your IRA and earn $40,000 from work, you're taxed as if you earned $90,000 that year (minus any deductions or credits).

This matters because large withdrawals can push you into a higher tax bracket. If you're in the 22 percent bracket and withdraw $50,000, the first portion of that withdrawal might be taxed at 22 percent, but the last portion could be taxed at 24 percent or higher, depending on your other income and filing status. Some people spread large withdrawals across multiple years to stay in a lower bracket.

Withdrawals can also trigger other tax consequences: they may increase your Medicare premiums (which are based on income from two years prior), they may make more of your Social Security taxable, and they may reduce certain tax credits you're may have access to to. A tax professional can help you plan the timing and size of withdrawals to minimize these effects.

Frequently Asked Questions

Can I withdraw my non-deductible contributions without paying tax?

Yes, but only the non-deductible portion is tax-free. The IRS uses the pro-rata rule, so if your account is 80 percent deductible contributions and growth, then 80 percent of any withdrawal is taxable, even if you're trying to withdraw only non-deductible money. You need Form 8606 on file to prove your basis.

What happens if I withdraw money to pay for college or medical bills?

Withdrawals for college (through the AOTC or AGTC programs) and medical expenses above 7.5 percent of your adjusted gross income are exempt from the 10 percent early withdrawal penalty, but you still owe ordinary income tax on the taxable portion. Other hardships do not have a penalty exception.

Do I have to pay tax on the growth inside my IRA before I withdraw?

No. Growth inside a traditional IRA—whether from interest, dividends, or capital gains—is never taxed while it sits in the account. You only pay tax when you withdraw the money. This tax deferral is the main advantage of the account.

What if I convert my traditional IRA to a Roth IRA?

A conversion is treated as a withdrawal for tax purposes. You owe ordinary income tax on the deductible portion of the amount converted. The pro-rata rule applies, so if your account is 80 percent deductible, you pay tax on 80 percent of the conversion amount. Non-deductible contributions are not taxed again.

Can I avoid RMDs by not touching my IRA?

No. Once you turn 73, RMDs are mandatory whether you need the money or not. If you don't withdraw the required amount, the IRS charges a 25 percent penalty on the shortfall. The only way to avoid RMDs is to have no traditional IRA balance at the start of the year you turn 73.