Distributions from Individual Retirement Accounts

Tax Treatment of IRA Distributions


  • Money taken out from an individual retirement account (IRA) is a distribution.
  • Distributions from an IRA are included as taxable income, unless the distribution qualifies for tax-exempt treatment.
  • Taxable distributions from IRAs are treated as ordinary income.
  • Early distributions from an IRA are subject to a 10% surtax, unless the person qualifies for an exception.

What's New for 2015

  • "Application of one-rollover-per-year limitation. Starting in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 1-year period regardless of the number of IRAs you own. However, you can continue to make unlimited trustee-to-trustee transfers between IRAs because this type of transfer is not considered a rollover. Furthermore, there is no limit on the number of rollovers from a traditional IRA to a Roth IRA (also known as conversions)." (IRS.gov, Publication 17, Your Federal Income Tax, chapter 17. For more information, see the Application of one-rollover limitation section of Publication 17.)

What's New for 2016

  • Rollover of certain airline payment amounts: Certain types of distributions from defined benefit plans paid to airline employees may be rolled over without tax consequences to a traditional IRA. The new provision is retroactive to the year 2014.
  • Rollovers permitted from other retirement plans into SIMPLE retirement accounts: After the ending the two-year period following the date an employee first participated in a SIMPLE IRA, employees may roll over funds from other group retirements plans (such as 401(k) plans) and traditional IRAs into their  SIMPLE IRA. Effective for rollovers after December 18, 2015.

General Rules

  • "In general, distributions from a traditional IRA are taxable in the year you receive them." 
  • "This means you must include such distributions in your gross income unless you roll them over."
  • "Distributions from traditional IRAs that you include in income are taxed as ordinary income."
  • "No special treatment. In figuring your tax, you cannot use the 10-year tax option or capital gain treatment that applies to lump-sum distributions from qualified retirement plans."
  • (IRS.gov, Publication 590-B, Distributions from Individual Retirement Arrangements.)

    Distributions that Qualify for Tax-Exempt Treatment

    As a general rule, distributions from IRAs are taxable in the year you receive the distribution. There are exceptions, however. An exception functions to make the distribution (or part of the distribution) exempt from tax, meaning the amount does not have to be included in a person's gross income. Exceptions include the following:

    • Rollovers,
    • Qualified charitable distributions,
    • Tax-free withdrawals of contributions,
    • The return of nondeductible contributions,
    • Qualified distributions from Roth IRAs,
    • One-time qualified Health Savings Account funding distribution, and
    • Distribution of an annuity contract from your IRA account.

    Continue Reading...