The short answer: it depends on the type of IRA and when you withdraw the money

An IRA itself is not taxable — it is a container that holds investments. What gets taxed is the money you take out of it. With a traditional IRA, you pay income tax on withdrawals in retirement. With a Roth IRA, you pay nothing on withdrawals if you follow the rules. The tax difference is the whole reason these two accounts exist separately.

The confusion happens because people use "taxable" to mean different things. Your IRA account is not taxed while the money sits inside it — that is the whole point. But the money itself will be taxed eventually, unless it is in a Roth and you withdraw it correctly.

Key Takeaways

  • Traditional IRA contributions may lower your taxable income now, but withdrawals in retirement are taxed as regular income.
  • Roth IRA contributions are made with after-tax money, so withdrawals in retirement are tax-free if the account is at least five years old and you are 59½ or older.
  • The tax you owe depends on which type of IRA you have, not on how much the investments inside it have grown.
  • If you withdraw money from a traditional IRA before age 59½, you owe income tax plus a 10 percent penalty, with narrow exceptions.

How traditional IRA taxes work

With a traditional IRA, you contribute money that may reduce your taxable income in the year you contribute it. That is the tax break upfront. But when you withdraw that money in retirement, you pay income tax on the full amount — both what you put in and all the growth it earned.

The IRS treats traditional IRA withdrawals as ordinary income, taxed at whatever your income tax rate is that year. If you withdraw $30,000 from a traditional IRA and you are in the 22 percent tax bracket, you owe roughly $6,600 in federal income tax on that withdrawal, plus any state income tax your state charges.

You do not have to withdraw money on any schedule you choose — except that the IRS requires you to start taking withdrawals at age 73 (as of 2023; this age has changed in the past). These are called required minimum distributions, or RMDs. If you do not take them, you owe a penalty on the amount you should have withdrawn.

How Roth IRA taxes work

A Roth IRA reverses the tax timing. You contribute money that does not reduce your taxable income now. But when you withdraw money in retirement, you owe no federal income tax — not on the contributions, not on the growth, nothing.

The catch is that you have to follow two rules. First, your Roth account must be at least five years old. Second, you must be at least 59½ years old when you withdraw. If both are true, withdrawals are completely tax-free. If either is false, you may owe taxes and a 10 percent penalty on the growth portion of your withdrawal.

Roth IRAs also have no required minimum distributions. You can leave the money in the account as long as you want, which makes them useful if you do not need the money in retirement or want to pass the account to heirs.

What happens if you withdraw money early

If you withdraw money from a traditional IRA before age 59½, you owe income tax on the withdrawal plus a 10 percent penalty on top of that. A $10,000 early withdrawal could cost you $2,200 in penalty alone, plus whatever income tax applies.

There are exceptions. You can withdraw without the penalty if you are disabled, if you use the money for unreimbursed medical expenses above a certain threshold, if you are unemployed and using it for health insurance premiums, or in a few other narrow situations. But the income tax still applies — only the penalty goes away.

Roth IRAs have a different rule: you can always withdraw your contributions (the money you put in) without tax or penalty, at any age. You can only withdraw the growth penalty-free if you meet the age and five-year rules. This makes Roth accounts slightly more flexible if you think you might need access to your money.

How investment growth is taxed inside an IRA

While money sits in an IRA — whether traditional or Roth — the investments inside it grow without triggering any tax. If you own stocks that pay dividends, you do not owe tax on those dividends. If you sell a stock at a gain, you do not owe capital gains tax. This tax-free growth is one of the main reasons IRAs are valuable.

The difference is when that tax bill arrives. In a traditional IRA, you defer the tax until withdrawal. In a Roth, you never pay it at all. But the growth itself is never taxed while it is inside the account, regardless of which type you have.

State income tax on IRA withdrawals

Federal income tax is only part of the picture. Most states also tax IRA withdrawals as ordinary income. A few states — including Pennsylvania, Illinois, and Mississippi — do not tax retirement account withdrawals at all. Others tax them like any other income.

If you live in a state with income tax and withdraw from a traditional IRA, you will owe both federal and state tax. The amount depends on your state's tax rate and your total income that year. Roth withdrawals that meet the rules are typically exempt from state tax as well, though you should check your specific state's rules.

Inherited IRAs and taxes

If you inherit a traditional IRA from someone other than a spouse, you must withdraw the money within ten years and pay income tax on it. The exact withdrawal schedule depends on when the original account owner died and whether they had started taking required minimum distributions.

Inherited Roth IRAs follow the same ten-year withdrawal rule, but the withdrawals are tax-free as long as the original account was at least five years old. This makes Roth accounts valuable for leaving money to heirs.

Frequently Asked Questions

Do I owe taxes on money that grows inside my IRA?

No. Investment growth inside an IRA — whether from dividends, interest, or capital gains — is not taxed while the money stays in the account. You only owe tax when you withdraw the money, and only on a traditional IRA (Roth withdrawals that meet the rules are tax-free).

Can I avoid taxes by keeping money in my IRA forever?

With a Roth, yes — you can leave it untouched and pass it to heirs tax-free. With a traditional IRA, no. You must start taking required minimum distributions at age 73, and those withdrawals are taxed as income. If you do not take them, you owe a penalty.

What if I have both a traditional and a Roth IRA?

You can have both. Contributions to each are separate, and each has its own tax rules. Withdrawals from a traditional IRA are taxed; withdrawals from a Roth (if the rules are met) are not. You do not have to withdraw from both in the same year.

Do I owe taxes on a rollover from one IRA to another?

Not if you do it correctly. A direct rollover — where the money moves from one institution to another without you touching it — is not taxable. If you withdraw the money yourself and deposit it within 60 days, it is also not taxed, but only once per year per account type.

Is there a way to withdraw from a traditional IRA without paying taxes?

No. All withdrawals from a traditional IRA are taxed as ordinary income. The only way to avoid tax is to not withdraw, but you cannot do that forever — required minimum distributions start at age 73. A Roth IRA is the account type designed to give you tax-free withdrawals.