Cashing out an IRA means requesting a distribution from your account, which your brokerage or custodian processes as a direct payment to you. The steps are straightforward, but the tax consequences depend on your age, the type of IRA, and how much you withdraw. Here’s what to expect from start to finish.
How the Withdrawal Process Works
Start by contacting the financial institution that holds your IRA. Most brokerages let you request a distribution online through your account dashboard, though some require a phone call or a signed distribution form. You’ll choose whether to receive the money via direct deposit, check, or wire transfer.
When you submit the request, your brokerage will ask whether you want federal income tax withheld from the distribution. For traditional IRA withdrawals, the default withholding rate is typically 10%, but you can elect a different percentage or opt out of withholding entirely. Keep in mind that skipping withholding doesn’t reduce your tax bill. It just means you’ll owe the full amount when you file your return. Most brokerages process distribution requests within three to five business days, though wire transfers can arrive faster.
If your IRA holds investments like stocks or mutual funds rather than cash, those positions need to be sold before the money can be distributed. Factor in an extra day or two for trade settlement.
Taxes You’ll Owe on a Traditional IRA
Every dollar you withdraw from a traditional IRA counts as ordinary income in the year you take it. That money gets added to your wages, freelance income, Social Security benefits, and anything else on your tax return, then taxed at your marginal rate. A $30,000 withdrawal on top of a $50,000 salary, for example, means you’re reporting $80,000 in income for the year.
You’ll report the distribution on Form 1040. Your brokerage will send you a Form 1099-R early the following year showing how much was distributed and how much was withheld for taxes.
The 10% Early Withdrawal Penalty
If you’re under 59½, the IRS charges a 10% additional tax on top of the regular income tax. On a $30,000 withdrawal, that’s an extra $3,000. Combined with federal and state income taxes, you could lose 30% to 40% of your withdrawal depending on your tax bracket.
One special case to watch: if you have a SIMPLE IRA and you’ve been participating for less than two years, the early withdrawal penalty jumps to 25% instead of 10%.
You’ll report the penalty on Form 5329, which you attach to your tax return. If you qualify for an exception (covered below), you use the same form to claim it.
Exceptions That Waive the Penalty
Several situations let you withdraw before 59½ without the 10% penalty. You still owe income tax on the distribution, but the extra penalty disappears. The main exceptions include:
- First-time home purchase: Up to $10,000 over your lifetime.
- Higher education expenses: Tuition, fees, books, and room and board for you, your spouse, children, or grandchildren at an eligible institution.
- Unreimbursed medical expenses: Amounts that exceed a certain percentage of your adjusted gross income.
- Health insurance premiums while unemployed: Applies after you’ve received at least 12 consecutive weeks of unemployment compensation.
- Total and permanent disability: As determined under IRS guidelines.
- Birth or adoption of a child: Up to $5,000 per child, taken within one year of the birth or adoption date.
- Qualified military reservist distributions: For reservists called to active duty.
- IRS levy: If the IRS itself levies your IRA to collect a tax debt.
If your 1099-R doesn’t show the correct exception code in box 7, you can still claim it by filing Form 5329 with your return.
Cashing Out a Roth IRA
Roth IRAs follow different rules because you already paid taxes on the money you contributed. You can withdraw your original contributions at any time, at any age, with no tax and no penalty. The IRS treats contributions as coming out first before any earnings.
Earnings are the tricky part. To withdraw earnings completely tax-free and penalty-free, two conditions must both be met: you must be at least 59½, and the Roth account must have been open for at least five years. The five-year clock starts on January 1 of the tax year you made your first Roth IRA contribution.
If you withdraw earnings before meeting both conditions, those earnings are taxed as ordinary income and may face the 10% penalty. The same exceptions listed above for traditional IRAs apply to the penalty on Roth earnings as well.
This distinction matters a lot for anyone cashing out a Roth. If you contributed $40,000 over the years and your account is now worth $55,000, the first $40,000 you pull out is tax-free regardless of your age. Only the $15,000 in earnings triggers potential taxes and penalties.
Using SEPP to Avoid the Penalty
If you need ongoing income from your IRA before 59½ and don’t qualify for any of the exceptions above, substantially equal periodic payments (known as SEPP or Rule 72(t)) let you set up a schedule of withdrawals without the 10% penalty.
The concept is simple: you commit to taking a fixed series of payments based on your life expectancy, and in return, the IRS waives the early withdrawal penalty. The IRS allows three calculation methods for determining your annual payment amount: the required minimum distribution method, which recalculates each year and generally produces the smallest payments; the fixed amortization method, which locks in a level dollar amount; and the fixed annuitization method, which also produces a fixed amount using an annuity factor.
The commitment is serious. Once you start SEPP payments, you cannot add money to the account or take extra withdrawals beyond the calculated amount. You must continue the payment schedule until the later of five years from the first payment or the date you turn 59½. If you modify the payments before that point, the IRS retroactively applies the 10% penalty to every distribution you took, plus interest. This makes SEPP a better fit for people who need steady income over several years rather than a one-time lump sum.
How Much You’ll Actually Receive
The gap between what you withdraw and what hits your bank account can be significant. Consider a simple example: you’re 45 years old, in the 22% federal tax bracket, and you cash out $50,000 from a traditional IRA.
- Federal income tax (22%): $11,000
- Early withdrawal penalty (10%): $5,000
- State income tax (varies): potentially another $2,000 to $5,000
Out of $50,000, you might keep roughly $30,000 to $32,000. If the withdrawal pushes part of your income into the next federal bracket, the effective tax rate on that portion climbs higher. The larger the withdrawal, the more pronounced this effect becomes.
If you’re over 59½ and pulling from a traditional IRA, you skip the penalty but still owe income tax on the full amount. Spreading a large cashout across two tax years, when possible, can keep you in a lower bracket and reduce the total tax hit.
What to Do After You Withdraw
Set aside enough cash to cover the taxes you’ll owe when you file. If your brokerage withheld 10% but your actual combined tax rate is closer to 30%, you’ll owe the difference at filing time. Underpaying by a large amount can also trigger an estimated tax penalty from the IRS, so consider making a quarterly estimated payment if the withholding falls short.
Keep your Form 1099-R when it arrives in January or February of the following year. You’ll need it to accurately report the distribution on your Form 1040. If you claimed a penalty exception, hold onto documentation supporting your eligibility, such as closing documents for a home purchase or tuition bills, in case the IRS asks.