If I do not have a job (thus no W-2) during the tax year that I withdraw from my traditional IRA, then do I not need to pay income taxes on my withdrawals?

Whether you have a job or not is irrelevant.  Income other than wages can still be taxable.

Your distribution would be subject to at least the 10% early-distribution penalty.  Whether or not the distribution would be subject to income tax would depend on whether the distribution (plus any other taxable income) exceeded your standard deduction or itemized deduction.

The earliest age that you can withdraw from a traditional IRA without penalty (unless you have another penalty exception) is age 59½.  The age-55 exception only applies to distributions from qualified retirement plans like a 401(k) and only if you separate from service in or after the year you reach age 55.

If you are willing to pay the tax and, prior to age 59½, the penalty, you can withdraw from a traditional IRA whenever you want.  For a qualified retirement plan, if you have separated from service with the company you can withdraw from the plan whenever you want and pay the tax and penalty.

Sorry, I meant if I stop working at age 56 and decide to withdraw my money from traditional IRA at age 60. Those four years I do not have income so no W-2. Then I am not subject to penalty and not subject to income tax?

Then if this is the case, why do people contribute to a Roth IRA when they can withdraw from their traditional IRA during a year that they do not have income, thus no income taxes?

Withdrawing from a Traditional IRA *IS* income subject to tax if over the minimum filing requirements.   Withdrawing from a Roth is *not* taxable income after retirement age (59 1/2) and the 5 year Roth ownership limit has been reached.

Depends on your total taxable income for the year and what the filing requirement will be four years from now.  As of now if your gross income exceeds $10,400 (for single - other filing statuses are different) then you must file and would pay some tax.

The key point is that an IRA withdrawal is always "subject to income tax." It makes no difference whether or not you have W-2 income in the same year. The IRA withdrawal is always taxable income. Whether you actually have to pay any tax on it depends on how much you withdraw and how much other income you have, of any kind, not just W-2 income. If the IRA withdrawal is large enough you will have to pay tax on it even if you have no other income at all. Not having W-2 income does not mean that you don't have to pay tax on the IRA withdrawal.

Certain states might not tax the traditional IRA distributions, but that's separate from the tax treatment on your federal tax return.

Lets say when I withdraw from my traditional IRA, I am age 60, head of household, married filing jointly or whatever the norm is then. I have no income that year I withdraw, and I withdraw $40000 over the span of a year. Essentially then this $40000 gets taxed at normal income tax rates?

You discovered the obfuscated disadvantage of IRA investing. When the money comes out, the taxes are high.

Traditional IRAs are tax-*deferred* savings, savings that are includible income when distributed.  IRA distributions are taxable as ordinary income.

The $40,000 traditional IRA distribution is included in your Adjusted Gross Income on your federal tax return.  Your AGI is then reduced by either the standard deduction or your itemized deduction to determine your taxable income.

If you are married you file a Joint return, not Head of Household.  Does your spouse have any income?  And there are other kinds of taxable income not just W2 wages.  Do you have any interest or dividends?  Oh, if you retire then how about any retirement income or Social Security?  

Pension income and Social Security income can be taxes form 0-85% depending on other income.   Your spouses income and Social Security, if any, are included on the total AGI to determine the taxable income.

Filing married separate returns would probably result in a higher overall tax and all Social Security becomes taxable.  

To clarify: Up to 85% of your Social Security benefits are taxable. Up to 100% of your pension is taxable.

What social security benefits? I don't work a government job and it seems my retirement money is coming from 401k. And plus this is potentially 10 years from now and possibly the laws will change

If you happen to be receiving Social Security Disability benefits, those benefits can be taxable along with your 401k distributions.  If you are not receiving any SS yet, that answer does not have to worry you.

Money that comes from a tax-advantaged retirement account, that was not taxed when it was contributed, is always taxed when you take the money out (because it was not taxed going in).  This applies to pensions, annuities, traditional IRA accounts, 401k, 403b accounts, and any other tax-advantaged retirement scheme.

There may be some exceptions—for example, a pension from a state government may be tax-free in that state, although it is still subject to federal income tax.  And social security is tax-free if your outside income is under the various limits that may apply to you.   A traditional IRA does not qualify for any tax-free treatments that I am aware of.

The current standard deductions are $12,000 for single and $24,000 for married filing jointly, so withdrawals under that amount aren't taxed either.  But once you withdraw more than that, you are subject to the 10% or 12% federal income tax rates, plus state income tax.

Roth IRAs are also an exception, in a Roth, the money was taxed going in, so once you reach retirement age, your withdrawals are tax-free, both the original contributions AND any gains.  But that only applies to Roth accounts.  And if you want to convert a traditional IRA to a Roth IRA, you'll have to pay the income tax when you do the conversion.

The chance that Congress will come to your rescue and change the IRA laws to your advantage is pretty slim. US is already $21T in debt.

Yes income other than W2 are taxable but not at the same rate (i.e. long term capital gains). Trad IRA withdrawal are taxed at income tax. if I make $150k now and by age 50 most of my net worth are in non liquidized assets, investment and business holdings, and I reinvest my dividends without realized gains, then i can control my realized gains at retirement, i.e. 50k a year withdrawal from trad IRA plus 100k from long term capital gains but the tax will be lower than the 150k im paying full income tax on now

You need a professional financial planner.

If you invest solely in after-tax stocks, mutual funds etc., you will have less money to invest ($1000 pre tax vs $700 after tax, for example).  And, as your investment grows, you will pay tax each year on dividends, and realized capital gains in the funds.  Then when you retire, most of the money you withdraw will be a mixture of original cost basis (no tax) and gains (15%).

Money in a tax-deferred retirement account is taxed as ordinary income, which might be 12% or 22% under current laws depending on how much you take out.  22% is certainly higher than 15%.  But, you invest more each year (because it's pre-tax, you can afford to put more in) and the growth is also tax-deferred.

Which is better for you depends on too many factors for us to tell you what to do.

(And this ignores the Roth IRA, and investing in tax-free muni funds, which adds another layer of complexity.)

Yes. The plan administrator will send you a 1099-R reporting all withdrawals you make in a tax year. Additionally, if you are not of retirement age that 1099-R will show at a minimum, a 10% withholding for the early withdrawal penalty.

Please see comment above.