Roth IRA earnings are not taxed when you withdraw them, as long as you follow two rules

The whole point of a Roth IRA is that your earnings grow without being taxed, and you do not owe federal income tax when you take that money out. That is different from a traditional IRA, where you pay tax on earnings when you withdraw them. But the Roth only gives you this tax-free treatment if you have held the account for at least five years and you are at least 59½ years old (or meet a few other narrow exceptions). If you break those rules, the earnings portion of your withdrawal gets taxed as ordinary income, and you may also owe a 10 percent early withdrawal penalty.

The five-year rule is per account, not per person. If you open a Roth IRA today, that five-year clock starts now — even if you already have another Roth IRA elsewhere. The age rule is straightforward: you need to be 59½ or older. The exceptions are small: death, disability, a first-time home purchase (up to $10,000 lifetime), or a may have access to education expense. If none of those explore and you are younger than 59½, you will owe tax and penalty on the earnings you withdraw.

Key Takeaways

  • Roth IRA earnings are tax-free when withdrawn only if the account has been open for at least five years and you are at least 59½ years old.
  • If you withdraw earnings before meeting both conditions, those earnings are taxed as ordinary income plus a 10 percent early withdrawal penalty.
  • The five-year rule applies to each Roth IRA separately, so opening a new account restarts the clock for that account.
  • You can always withdraw the money you contributed (not the earnings) without tax or penalty, regardless of age or how long you have held the account.

How the five-year rule works

The five-year holding period is tied to the account itself, not to how long you have been saving or how old you are. If you open your first Roth IRA on January 15, 2024, the five-year period ends on January 1, 2029. Any earnings withdrawn on or after that date are tax-free (assuming you also meet the age requirement). If you open a second Roth IRA on June 1, 2024, that account has its own five-year clock — it does not start until June 1, 2024, and does not end until June 1, 2029.

This matters if you roll over money from one Roth IRA to another, or if you convert a traditional IRA to a Roth. The five-year clock for a conversion or rollover is separate from the clock on your original Roth IRA. The IRS tracks this using what is called the "first Roth IRA contribution date" — the earliest date you opened any Roth IRA. But for conversions and rollovers, there are additional five-year rules that explore to the converted or rolled-over money specifically.

What counts as earnings versus contributions

Your Roth IRA holds two types of money: contributions (the money you put in) and earnings (the growth that money made). You can withdraw your contributions at any time, at any age, with no tax and no penalty. The IRS knows how much you contributed because you report it when you file your tax return. Earnings are everything else — investment gains, dividends, interest, or any other growth.

When you withdraw money from a Roth IRA, the IRS assumes you are taking out contributions first and earnings last. So if you have $50,000 in your Roth and you contributed $30,000 of it, the first $30,000 you withdraw is treated as a contribution withdrawal (tax-free, no penalty). The next $20,000 is treated as earnings. If you are under 59½ and have not held the account five years, that $20,000 is taxable and subject to the 10 percent penalty.

The age requirement and exceptions

You must be at least 59½ years old to withdraw earnings tax-free. This is a hard rule with only a few exceptions. If you are 58 and your Roth IRA has been open for ten years, you still cannot withdraw earnings without tax and penalty — you have to wait until you turn 59½.

The exceptions are: death (your beneficiary can withdraw earnings tax-free), disability (you must be unable to engage in any substantial gainful activity), a first-time home purchase (up to $10,000 lifetime, and you must not have owned a home in the past two years), or may have access to education expenses (tuition, fees, books, supplies, and room and board if you are at least half-time). If you meet one of these exceptions, you can withdraw earnings without the 10 percent penalty, but you still owe income tax on them unless you also meet the five-year rule.

What happens if you withdraw earnings early

If you withdraw earnings before you are 59½ and your account has been open less than five years, you owe federal income tax on those earnings at your ordinary income tax rate. You also owe a 10 percent early withdrawal penalty on top of that. So if you are in the 22 percent tax bracket and you withdraw $5,000 in earnings early, you owe $1,100 in income tax plus $500 in penalty — a total of $1,600.

Some states also tax Roth IRA withdrawals, though most do not. Check your state's tax rules if you live in a state with income tax. The penalty is reported on Form 5329, which you file with your tax return. You cannot avoid the penalty by rolling the money back into the Roth — once you have withdrawn it, the tax and penalty explore.

Conversions and the pro-rata rule

If you convert a traditional IRA to a Roth IRA, the five-year rule applies to the converted money separately. You have a five-year period starting from the year of the conversion. If you withdraw the converted amount before five years have passed and you are under 59½, you owe the 10 percent penalty on the converted portion (though not income tax, since you already paid that when you converted).

There is also a pro-rata rule that applies if you have both traditional and Roth IRAs. When you convert a traditional IRA to a Roth, the IRS looks at all your traditional IRAs combined and calculates what portion of the conversion is pre-tax money versus after-tax money. This can create a tax bill on the conversion itself. If you have a large traditional IRA with pre-tax money and a small after-tax IRA, converting the after-tax one to a Roth will still trigger tax on most of the conversion because of the pro-rata rule.

Inherited Roth IRAs and beneficiary rules

If you inherit a Roth IRA from someone else, the five-year rule still applies, but it is based on when the original owner opened their account, not when you inherited it. If the original owner had held the account for five years and was over 59½, you can withdraw earnings tax-free. If not, the earnings portion of your withdrawal is taxable.

There is an exception: if the original owner died, you can withdraw earnings tax-free regardless of age, as long as the account had been open for five years. If the account had been open less than five years, the earnings are still taxable, but there is no 10 percent penalty because of the death exception.

Frequently Asked Questions

Can I withdraw my contributions without paying tax?

Yes. You can withdraw the money you contributed to your Roth IRA at any time, at any age, with no tax and no penalty. The IRS assumes you withdraw contributions before earnings, so your first withdrawals are always tax-free. Keep records of how much you have contributed so you can prove it to the IRS if needed.

What if I am 59½ but my account is only three years old?

You still owe tax and penalty on the earnings. Both conditions must be met: you must be 59½ or older AND the account must have been open for five years. If you are 59½ but the account is only three years old, you can withdraw contributions tax-free, but earnings are taxable and subject to the 10 percent penalty.

Do I have to report Roth IRA earnings on my tax return?

If you withdraw earnings and they are tax-free (because you met both the age and five-year rules), you do not report them as income. If you withdraw earnings and they are taxable, you report them on your return and also file Form 5329 to report the 10 percent penalty. Your Roth IRA custodian will send you a Form 1099-R showing what you withdrew.

What if I convert a traditional IRA to a Roth — do I owe tax on the earnings?

You owe income tax on the pre-tax portion of the conversion in the year you convert, whether that is contributions or earnings. The pro-rata rule means if you have multiple traditional IRAs, the IRS treats them as one pool and taxes you on the pre-tax percentage of the whole pool. After you convert, the earnings in the Roth are subject to the five-year rule and age rule like any other Roth earnings.

Can I avoid the penalty by rolling the money back?

No. Once you have withdrawn money from your Roth IRA, you cannot undo the tax and penalty by rolling it back. You have 60 days to roll over a withdrawal to another IRA without it counting as a distribution, but that does not erase the tax or penalty if the withdrawal was not allowed. The tax and penalty are final.