There are a number of different circumstances that can impact IRA distributions. Get details about various situations, such as distributions after death, as you read this guide. If you have questions about something you are personally facing, talk to a local tax expert.

Generally, payments from Traditional IRA accounts are currently taxable under the annuity rules of IRC Sec. 72 and must be included as ordinary income in the year received. Neither special averaging nor capital gain treatment is available for the distributions. The annuity rules require the following for IRA distributions when both deductible and non-deductible contributions have been made to the IRA:

Note: IRS Pub 590-B says to compute RMD for each IRA separately (which makes sense because there could be different beneficiaries that would cause different life expectancy tables to be used – for example if beneficiary spouse’s age was +10 years different than IRA owner’s age and a non-spouse was beneficiary of another IRA). The “one contract” and “treat all distributions as one” only applies when figuring the taxable and non-taxable portions of a distribution – Sec 408(d)(2).

Where a taxpayer has made no non-deductible contributions to the IRA, there is no investment in the contract.  100% of the distribution is taxable.  Alternatively, where both deductible and Non-deductible contributions have been made, a portion of the distribution is non-taxable (see “Effect of Non-deductible Contributions” below).

Distributions after the IRA owner’s death to beneficiaries are taxable to the beneficiaries as income in respect of a decedent (IRD). Non-deductible contributions made by the decedent are taken into account in determining taxability (just as they would have been for the decedent). A beneficiary who is taxed on IRA IRD is allowed a Tier 1 itemized deduction for estate tax attributable to the IRD. See Chapter 4.17.

The following IRA distributions are 100% tax-free:

Acquiring certain collectibles in a Traditional IRA is treated as a distribution equal to the cost of the collectible. Collectibles to be avoided are works of art, rugs, antiques, metals or gems, stamps or coins, alcoholic beverages, etc. Certain gold coins are not considered collectibles.

In Notice 2023-27, the IRS says it will be issuing guidance related to the treatment of certain non-fungible tokens (NFTs) as collectibles under IRC Sec 408(m) (which pertains to prohibited investments for IRAs). If an NFT is treated as a collectible, an IRA's acquisition of the NFT would be treated as a distribution equal to the cost of the NFT. Until the guidance is issued, the IRS intends to determine whether an NFT is a collectible by a “look-through analysis” as to   whether the NFT’s associated right or asset is an IRC Sec. 408(m) collectible. For example, this could be an NFT that certifies ownership of a gem. But if the NFT's associated right or asset is not a collectible (for example, a right to use a plot of land in a virtual environment), then the NFT is not treated as a collectible. If the NFT's associated right or asset is a digital file, the IRS would apply the look-through analysis by asking whether the digital file constitutes a "work of art" under Code Sec. 408(m)(2)(A). If it does, the NFT would be a Code Sec. 408(m) collectible.

Rev Rul 2019-19 concludes that an individual’s failure to cash a qualified plan or IRA distribution check does not permit the individual to exclude the amount of the designated distribution from gross income and does not alter the employer’s withholding obligations or Form 1099-R reporting obligations. Thus, the distribution is taxable in the year of the distribution. This rule applies if the individual could have cashed the check and would apply whether the individual keeps the check, sends it back, destroys it, or cashes it in a later tax year.