IRA taxes: Contributions, withdrawals & more

When planning for retirement, you've likely given some thought to the types of savings accounts you need to fund for your post-workforce lifestyle. Your retirement plan may include a traditional or Roth individual retirement account (IRA), a tax-advantaged financial product that allows you to contribute money and experience tax-deferred growth.

Here, we break down how IRAs are taxed so you can work on your financial plan with tax efficiency in mind.

The type of IRA you own, traditional or Roth, will determine how they're taxed and when they’re taxed. We will explore the tax differences at the various stages of these IRAs: contributions, earnings and withdrawals.

Both traditional and Roth IRAs have 2025 contribution limits of $7,000, with an additional $1,000 catch-up contribution if you’re 50 or older. You must make contributions to either type of IRA with earned income. However, the tax-deductibility varies between the types.

With a traditional IRA, contributions generally aren't taxable. Instead, you get a tax deduction in the year you contribute. Exceptions apply if your modified adjusted gross income (MAGI) exceeds certain thresholds and you participate in a retirement plan through your employer or your spouse's employer.¹ You can't deduct more than the maximum annual contribution.

Roth IRA contributions are taxed as ordinary income at the rate of your tax bracket. In other words, you make contributions to a Roth with after-tax dollars.

IRA earnings—such as interest, dividends and capital gains—grow tax-deferred as long as the money remains in either type of IRA. Once withdrawn, the taxation changes.

Traditional IRA earnings grow tax-deferred and are taxed at your ordinary income rate once you make a withdrawal.

The key power of Roth IRAs is that your earnings have the potential to never be taxed. If used correctly, they are a truly tax-free option for your retirement plan. If you wait to withdraw any earnings from the account until after five years of making your first contribution and after turning 59½, you will have no tax liability on that money.²

Learn more about the Roth IRA five-year rule

Qualified IRA withdrawals, also called qualified distributions, also are taxed differently depending on the type of IRA. However, there may be additional penalties if you are making an early withdrawal.

Any distributions you take from your traditional IRA after you turn 59½ will be taxed as ordinary income.

Nonqualified traditional IRA withdrawals before you turn 59½ may be subject to a 10% penalty. You might not owe the penalty on early distributions in some circumstances. These include, but are not limited to, qualified birth or adoption expenses (up to $5,000 per child), first-time homebuyer expenses (up to $10,000), your own total and permanent disability and qualified higher education expenses.

You can withdraw Roth IRA contributions at any time, no matter your age, without owing taxes. You also can withdraw earnings without owing taxes starting after you turn 59½ and after your account has been open for five years.²

An RMD is the minimum amount of money you must withdraw from a tax-deferred retirement plan after you reach a certain age. RMDs are required on traditional IRAs, but not on Roth IRAs.

Traditional IRA RMDs start when you turn 73 if you were born from January 1, 1951, through December 31, 1959. If you were born later, they start at age 75. Your RMD is equal to your account balance at the end of the previous year divided by the appropriate life expectancy factor from IRS Publication 590-B.

You must take your first RMD by April 1 of the year after your RMD age. You must take subsequent annual RMDs by December 31 (which means that if you postponed your first RMD to the following year, you would have two RMDs in the second year).

RMDs are taxed as ordinary income. The tax penalty for not taking RMDs is up to 25% of the amount you were supposed to withdraw.

RMDs ensure the government gets its share of taxes from pre-tax money in traditional IRAs. Qualified Roth IRA withdrawals are not taxable because the owner already paid income tax on Roth IRA contributions, so there's no deferred tax to recoup.

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When the original account holder dies, the IRA will pass to a beneficiary and become an inherited IRA. Inherited accounts follow another set of rules that depend on the type of IRA and who inherits it.

You may be able to delay taxes on an IRA inherited from a spouse by transferring the money to an IRA in your name or by establishing an inherited IRA in your spouse's name.

If it's a traditional IRA, the starting age for RMDs corresponds with whose name the money is in. If it's a Roth IRA, RMDs don't apply and qualified withdrawals aren't taxable, but if you establish an inherited IRA, you may have to empty the account within 10 years, depending on the option you choose.

Both traditional and Roth IRAs inherited from a parent or a non spouse require distributions, but only traditional IRA distributions will be taxable. Distributions of Roth IRA earnings only are taxable if the original owner had the account for less than five years.

Transferring the money to your own IRA is not an option under the inherited IRA rules for non-spouse beneficiaries. Withdrawing everything as a lump sum is an option but may result in a larger tax bill than taking distributions over several years, especially if the account balance is six figures or more.

Get more detail by visiting our inherited IRA guide

As you're planning for retirement, think about your future tax rate on IRA withdrawals.

• Do you expect to be in a higher tax bracket in retirement? If so, you might want to invest in a Roth IRA for tax-free withdrawals down the road.
• Do you expect to be in the same or a lower tax bracket? If so, a traditional IRA can maximize account growth in the years leading up to retirement, while offering immediate tax advantages.

If you already fund an IRA or want to start, talk with a Thrivent financial advisor about creating a financial plan to reap the greatest tax savings.