Traditional and Roth IRA withdrawal rules and early withdrawal penalties

If you’re trying to determine which Individual Retirement Arrangement (IRA) is best for you—a Traditional IRA or Roth IRA, you’ll need to consider many of the aspects and tax implications of each arrangement. To make the best choice for retirement planning, it’s important to understand the withdrawal rules for each and when early withdrawal penalties (officially called the 10% additional tax) apply.

Read on, and we’ll outline everything you need to know about IRA withdrawal guidelines, including the “when” and the “how” for taking withdrawals from Traditional and Roth IRAs—so you can maximize your retirement savings.

Roth IRA withdrawal rules

When you’re taking a withdrawal from your Roth IRA, none of the withdrawal is taxable if it’s a qualified distribution. Any part of the withdrawal that is not a qualified distribution may be taxable.  

Roth IRA withdrawal rules: When are withdrawals tax free?

When you make a qualified withdrawal from your Roth IRA, earnings (income) are tax-free if:

• You’ve owned the Roth IRA for at least five years, and
• One of the following applies:
  • You’re age 59 1/2 or older when you withdraw the money
  • You used the money for a first-time home purchase (up to $10,000)
  • You’re totally and permanently disabled
  • You’re the beneficiary of the original account owner who passed away

If the account owner passes away before meeting the first rule, also called the “five-year test” beneficiaries will be taxed on the withdrawals. For example, if the original owner owned the IRA for three years, the beneficiary must take distributions until the IRA is fully distributed and the distribution would be included in the beneficiary’s gross income—even after two years (which would amount to the five years from when the IRA was originally opened) the distributions would continue to be taxed.

No matter your age, your earnings are taxable if the original account (IRA) owner had not met the five-year rule. This is true even if your earnings are penalty-free.

The IRS requires your IRA custodian or trustee to send you Form 5498. This form shows your:

• IRA contributions made during the year
• All IRA conversions during the tax year
• All rollover contributions during the tax year

You should receive the form by the end of May. Keep these records.

When you withdraw funds from your Roth IRA, you must report it on Form 8606. This form helps you track your basis in regular Roth contributions and conversions. It also shows if you’ve withdrawn earnings.

Roth IRA distribution rules: Distribution order

If the money you withdraw from a Roth IRA isn’t a qualified distribution, part of it might be taxable. There’s a sequential order under the Roth IRA distribution rules in which your contributions and rollover contributions from other retirement plans and earnings are considered distributed. This order determines whether taxes are due. You must make distributions in the following order:

1. First, regular contributions are considered to be withdrawn first.
2. Next, conversion and rollover contributions—on a first-in, first-out basis. So, conversions from the earliest year come out first. Read more about converted amounts below.
3. Earnings on contributions are taxable if the distribution isn’t qualified (and may be subject to an additional 10% tax.) Any part of the unqualified distribution that contains basis is not taxed or subject to the additional 10% tax.

Roth IRA early withdrawal additional tax (sometimes called the Roth IRA early withdrawal penalty)

If you receive a distribution or withdrawal that isn’t a qualified distribution, it may be subject to the 10% additional tax on early distributions. This is sometimes mistakenly referred to as the “Roth IRA early withdrawal penalty.” It’s not actually a penalty from drawing from your IRA, rather it’s an additional tax added to taxable distributions unless an exception applies.

If you take a distribution after a conversion or if any part of the Roth IRA withdrawal is not a qualified distribution, a 10% additional tax, sometimes referred to as the “early withdrawal penalty,” applies unless one of the exceptions (discussed below) applies.

Converted amounts from Traditional to Roth IRA

If you convert a Traditional IRA to a Roth IRA, you must pay taxes on the conversion, but you won’t have to pay taxes on qualified withdrawals of the converted amount.

So, what makes it a qualified withdrawal? First, the money must stay in the Roth IRA for at least five years after the year you make the conversion. The five-year conversion rule is also separate from the five-year qualified withdrawal rule discussed above. Also, every conversion starts a new five-year clock with that converted amount.

Roth IRA required minimum distribution rules

There’s no required minimum distribution for the owner of a Roth IRA during their lifetime. So, you’re not required to withdraw any amount from your Roth IRA during your lifetime. This can be an advantage of a Roth IRA over a Traditional IRA, which does require you to start taking distributions when you reach a certain age.

However, take note: You must take RMDs if you have an inherited Roth IRA.

Traditional IRA withdrawal rules

Traditional IRA distributions

Generally, distributions from a Traditional IRA are taxable in the year you receive them. Early distributions (taken before age 59½) from IRAs are generally subject to the 10% additional tax unless a specific exception applies.

Exceptions to the IRA account withdrawal rules for distributions being taxable in the year received include:

• Rollovers
• Qualified charitable distributions
• Tax-free withdrawals of contributions, and
• Return of nondeductible contributions

IRA early withdrawal penalties for Traditional IRAs

There is a 10% additional tax, sometimes mistakenly called the “IRA early withdrawal penalty,” for taking early withdrawals from your Traditional IRA . You can receive distributions from your Traditional IRA before age 59 1/2 without paying the 10% early withdrawal tax or “penalty” for withdrawing early from an IRA. The following distributions aren’t subject to the 10% additional tax:

• Qualified disaster recovery distributions (see Form 8915-F for more details),
• Qualified distributions for the birth or adoption of a child,
• Qualifying HSA funding distributions,
• Distributions from traditional or SIMPLE IRA converted to a Roth IRA,
• Rollovers from a qualified retirement plan to a Roth IRA,
• Distributions of excess deferrals,
• Distribution of excess aggregate contributions,
• Distributions from eligible governmental Section 457 deferred compensation plans

Note: Additional requirements may apply to claim one of the exceptions listed above.

The following Traditional IRA early withdrawal situations (also applies to Roth IRAs) may also be exceptions to the 10% tax if the special rules for each exception are met:

• Distributions up to the amount of unreimbursed medical expenses paid, minus 7.5% of your AGI for the year
• Distributions made to certain unemployed individuals for medical insurance premiums
• The distribution for a personal or family emergency expense that is unforeseeable or immediate
• Distributions due to total and permanent disability
• Distributions due to terminal illness made after December 30, 2023
• Distributions for victims of domestic abuse made after December 31, 2023
• Distributions to the beneficiary for a deceased IRA owner
• Distributions made for qualified higher education expenses
• Distributions used to purchase a first home (up to $10,000)
• The distribution is due to an IRS levy
• The distribution is a qualified reservist distribution
• Distributions received as a series of substantially equal periodic payments

Traditional IRA account withdrawal rules after death

If you die while there’s still money in your Traditional IRA account, how the account will be treated for tax purposes by your beneficiaries depends on whether you had started taking distributions before your date of death.

If you had begun taking distributions before your date of death, the balance of the IRA must be distributed to the IRA’s beneficiaries at least as rapidly as the method you were using before you died. That is, your beneficiaries are taxed on the same amount of distributions that you were taking before you died.

5-year rule: If the IRA does not have a designated beneficiary and you have not begun taking distributions from it, then the 5-year rule applies. The 5-year rule means that the distribution must be completed by December 31 of the fifth year following the year of the original account owner’s death.

10-year rule: IRAs that are inherited after 12/31/19 must generally be fully distributed by the end of the 10th year following the year of the original account owner’s death.

It’s important to note that this rule applies only if the beneficiary is someone other than a spouse, an individual who is at least 10 years younger than the decedent, or is an applicable trust.

If you had already begun taking distributions before you died, your IRA’s beneficiaries must continue to take distributions during the 10-year period following the year you died using their own life expectancy to determine the distribution amount. The full balance of the IRA needs to be fully distributed by the end of the tenth year.

If you had not begun taking distributions before you died, your IRA’s beneficiaries are not required to take any distributions each year. However, they must not leave any balance in the IRA by the end of the tenth year.

Life expectancy: Depending on whether the plan is a defined contribution plan or a defined benefit plan, the distribution must be made over the life expectancy of the original account owner or the life expectancy of the designated beneficiary. Withdrawal rules are slightly different if you inherit an IRA from your deceased spouse.

Beneficiaries of inherited IRAs should check with their tax professional to determine if and when the beneficiary is required to take RMDs as well.

Required Minimum Distributions (RMDs) for Traditional IRAs

RMDs are not the same as distributions, and special rules apply to RMDs. View more information on Required Minimum Distributions and how they’re taxed.

Looking for help understanding Traditional or Roth IRA withdrawal rules?

There’s a lot to take in where traditional and Roth IRA withdrawal rules are concerned, and errors can be very costly. If you need help understanding your options, our knowledgeable tax pros can help.

Whether you choose to file with a tax pro or file with H&R Block Online, you can rest assured that we’ll get you the biggest refund possible, along with proper guidance in knowing you’ve filed with complete accuracy.