Traditional IRA contributions are tax-deductible in the year you make them, and withdrawals in retirement are taxed as ordinary income at your federal income tax rate. This “tax now or tax later” structure is the core of how a traditional IRA works: you get a tax break up front, then pay taxes when you take the money out. How much you owe depends on when you withdraw, how much you take, and whether your original contributions were fully deductible.
Tax Deduction When You Contribute
If you contribute to a traditional IRA, you may be able to deduct that contribution from your taxable income for the year. Whether you get the full deduction, a partial one, or none at all depends on two things: whether you (or your spouse) are covered by a retirement plan at work, and how much you earn.
If neither you nor your spouse has a workplace retirement plan like a 401(k), you can deduct your full contribution regardless of income. If you do have a workplace plan, the deduction phases out at certain income levels based on your modified adjusted gross income (MAGI). For 2026, single filers covered by a workplace plan can take the full deduction with a MAGI of $81,000 or less, a partial deduction between $81,000 and $91,000, and no deduction at $91,000 or above. Married couples filing jointly get the full deduction up to $129,000, with the phase-out ending at $149,000.
There’s a special rule if you’re not covered by a workplace plan but your spouse is. In that case, you can still take the full deduction as long as your joint MAGI is $242,000 or less in 2026.
Even if your income is too high to deduct contributions, you can still contribute to a traditional IRA. Those nondeductible contributions won’t reduce your tax bill now, but the earnings still grow tax-deferred until withdrawal. You’ll want to track nondeductible contributions carefully on IRS Form 8606, because that portion won’t be taxed again when you withdraw it.
How Withdrawals Are Taxed
When you take money out of a traditional IRA, the IRS treats it as ordinary income. It gets added to your other income for the year, including wages, Social Security, and any other retirement distributions, and taxed at your regular federal income tax rate. This is true whether the money comes from contributions, dividends, interest, or investment gains. There is no preferential capital gains rate for IRA withdrawals.
If you made nondeductible contributions (money you put in without taking a tax deduction), a portion of each withdrawal is considered a tax-free return of those contributions. The IRS uses a pro-rata rule to calculate this: it looks at your total nondeductible contributions as a percentage of your total traditional IRA balance across all your traditional IRA accounts, then applies that percentage to determine how much of the withdrawal is tax-free. You can’t simply withdraw only the nondeductible portion first.
Most states with an income tax also tax traditional IRA distributions as ordinary income, though a handful exempt some or all retirement income.
The 10% Early Withdrawal Penalty
If you withdraw from a traditional IRA before age 59½, you’ll owe a 10% additional tax on top of the regular income tax. On a $10,000 early withdrawal in the 22% tax bracket, that means $2,200 in income tax plus a $1,000 penalty, totaling $3,200.
Several exceptions let you avoid the 10% penalty (though you still owe income tax on the withdrawal):
- First-time home purchase: Up to $10,000 for buying, building, or rebuilding a first home
- Higher education expenses: Tuition, fees, books, and room and board for you, your spouse, children, or grandchildren
- Large medical bills: Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income
- Health insurance while unemployed: Premiums paid after receiving unemployment compensation for at least 12 weeks
- Disability: Total and permanent disability
- Birth or adoption: Up to $5,000 per child
- Substantially equal periodic payments: A series of roughly equal annual withdrawals calculated using IRS-approved methods, taken for at least five years or until you reach 59½, whichever is longer
- Emergency personal expenses: One withdrawal per calendar year up to $1,000 for personal or family emergencies
- Federally declared disasters: Up to $22,000 if you suffered an economic loss from a qualifying disaster
- Domestic abuse: Up to $10,000 (or 50% of the account, whichever is less) for victims of domestic abuse
One extra wrinkle: if you have a SIMPLE IRA and take a distribution within the first two years of participating in the plan, the penalty jumps to 25% instead of 10%.
Required Minimum Distributions Starting at 73
Unlike a Roth IRA, a traditional IRA doesn’t let you leave money untouched indefinitely. You must start taking required minimum distributions (RMDs) by April 1 of the year after you turn 73. After that first year, each RMD is due by December 31.
The amount you must withdraw each year is calculated by dividing your account balance (as of December 31 of the prior year) by a life expectancy factor from IRS tables. As you age, the factor shrinks, which means the percentage you must withdraw gradually increases. In your early 70s, the required withdrawal is roughly 3.6% to 4% of your balance. By your mid-80s, it climbs closer to 6% or 7%.
Missing an RMD is expensive. The penalty is 25% of the amount you should have withdrawn but didn’t. If you correct the mistake within two years by taking the missed distribution and filing the appropriate paperwork, the penalty drops to 10%. Either way, the distribution itself is still taxed as ordinary income when you take it.
How Inherited Traditional IRAs Are Taxed
When someone inherits a traditional IRA, withdrawals are taxed as ordinary income to the beneficiary, just as they would have been to the original owner. The specific rules for how quickly the account must be emptied depend on the beneficiary’s relationship to the deceased.
A surviving spouse has the most flexibility. They can roll the inherited IRA into their own IRA and treat it as theirs, delaying RMDs until they reach 73. They can also keep it as an inherited IRA and take distributions based on their own life expectancy.
Most other beneficiaries, including adult children, siblings, and friends, must follow the 10-year rule. This means the entire account must be emptied by the end of the 10th year after the original owner’s death. There’s no annual minimum during those 10 years, but everything must be withdrawn (and taxed) by that deadline. Spreading withdrawals across the full 10 years can help avoid a large spike in taxable income in any single year.
A few categories of “eligible designated beneficiaries” can stretch distributions over their own life expectancy instead of following the 10-year rule. This includes minor children of the deceased (until they reach the age of majority, at which point the 10-year clock starts), chronically ill or disabled individuals, and beneficiaries who are not more than 10 years younger than the deceased.
Tax Impact Over a Lifetime
The traditional IRA’s tax structure works in your favor when your tax rate in retirement is lower than it was during your working years. If you deduct contributions while earning $90,000 and later withdraw in retirement while reporting $45,000 in total income, you claimed the deduction at a higher rate than you’ll pay on the withdrawal.
On the other hand, if your retirement income turns out to be similar to or higher than your working income, possibly because of pensions, Social Security, RMDs from multiple accounts, or part-time work, you may not come out ahead compared to a Roth IRA, where contributions are made after tax but withdrawals are tax-free. Large traditional IRA balances can also push RMDs high enough to increase the taxable portion of your Social Security benefits or push you into a higher Medicare premium bracket.
Keeping track of any nondeductible contributions you’ve made is essential. Filing Form 8606 each year you make a nondeductible contribution creates a paper trail that prevents you from being taxed twice on that money when you eventually withdraw it.