The short answer: your contributions come out tax-free, but earnings have rules

Money you put into a Roth IRA is never taxed when you withdraw it — you already paid income tax on that money before it went in. The earnings (interest, dividends, and investment gains) are also tax-free when you withdraw them, but only if you follow two rules: you must be at least 59½ years old, and your account must have been open for at least five years. If you break either rule, the earnings portion gets taxed as ordinary income, and you may owe a 10% penalty on top.

The five-year rule applies to your entire Roth IRA account, not to each contribution separately. So if you opened your first Roth IRA in 2020, all your Roth accounts (including conversions from traditional IRAs) follow the same five-year clock that started in 2020.

Key Takeaways

  • Contributions to a Roth IRA can always be withdrawn tax-free and penalty-free, regardless of your age or how long the account has been open.
  • Earnings are tax-free only if you are at least 59½ and your account has been open for five tax years; otherwise you owe income tax and a 10% penalty on the earnings portion.
  • The five-year rule is tied to your first Roth IRA opening date, not to when you made each individual contribution.
  • Roth conversions (money moved from a traditional IRA to a Roth) follow a separate rule: converted amounts have their own five-year waiting period before you can withdraw them penalty-free.

How contributions and earnings are treated differently

A Roth IRA withdrawal is divided into two parts: your contributions (the money you put in) and your earnings (the growth on that money). The IRS treats them completely differently for tax purposes.

Your contributions are always yours to take out. You paid tax on this money when you earned it, so the IRS does not tax it again. You can withdraw contributions at any age, at any time, with no tax and no penalty. This is true even if your account is only a few months old.

Your earnings are the investment gains — the interest, dividends, and capital gains your money made while sitting in the account. These are tax-free when you withdraw them, but only if two conditions are both met: you must be at least 59½ years old, and your Roth IRA must have been open for at least five tax years. If either condition is not met, the earnings are taxed as ordinary income, and you also owe a 10% early withdrawal penalty.

The five-year rule and how it works

The five-year rule is not about how long you have held the money — it is about when you first opened a Roth IRA. The clock starts on January 1 of the tax year in which you opened your first Roth account. Once five tax years have passed, the rule is satisfied for all your Roth accounts, even if you opened some of them later.

For example: if you opened your first Roth IRA on June 15, 2020, the five-year period began on January 1, 2020. The five years end on December 31, 2024. Starting January 1, 2025, you can withdraw earnings tax-free (assuming you are also 59½). If you opened a second Roth IRA in 2023, it still uses the same five-year clock — you do not start a new one.

This rule applies even if you do not contribute to your Roth every year. The clock keeps running whether your account is active or dormant.

What happens if you withdraw earnings before age 59½

If you withdraw earnings before you turn 59½, you owe income tax on those earnings at your regular tax rate, plus a 10% early withdrawal penalty. The penalty is calculated on the earnings amount only, not on your contributions.

For example: suppose you have a Roth IRA with $5,000 in contributions and $2,000 in earnings. You are 45 years old and your account has been open for six years. If you withdraw $4,000, the first $4,000 comes from your contributions (tax-free and penalty-free). If you withdraw $6,000, the first $5,000 is contributions (tax-free), and the remaining $1,000 is earnings. That $1,000 is taxed as ordinary income, and you owe a 10% penalty ($100) on it.

There are some exceptions to the 10% penalty — for example, if you are disabled, if you use the money for a first-time home purchase (up to $10,000 lifetime), or if you use it for certain medical or education expenses. But the income tax on the earnings still applies in most cases.

Roth conversions and their own five-year rule

If you convert money from a traditional IRA to a Roth IRA, that converted amount has its own five-year waiting period. You cannot withdraw the converted amount penalty-free until five tax years have passed, even if your original Roth IRA has been open longer.

The good news: the conversion amount itself (the principal you moved over) can be withdrawn anytime without penalty. The bad news: any earnings on that converted money follow the same five-year rule as earnings on regular contributions. If you withdraw the earnings before five years have passed and before age 59½, you owe tax and penalty on those earnings.

Conversions are tracked separately by the IRS, so if you convert in 2024, that conversion's five-year clock runs from January 1, 2024 through December 31, 2028. A conversion you make in 2025 has its own separate clock.

Inherited Roth IRAs and taxation

If you inherit a Roth IRA from someone else, the tax rules change. You can withdraw contributions tax-free and penalty-free at any time. But inherited earnings follow different rules depending on whether the original account owner had satisfied the five-year requirement and reached age 59½.

If the original owner met both conditions, you can withdraw earnings tax-free. If the original owner did not meet both conditions, you owe income tax on the earnings portion, though the 10% penalty usually does not explore to inherited accounts. The rules for inherited Roth IRAs are complex and depend on your relationship to the deceased and when they opened the account, so it is worth reviewing the details with a tax professional if you inherit one.

State taxes and Roth IRAs

Roth IRA withdrawals are not subject to federal income tax (assuming the rules are met), and they are also not subject to state income tax in any state. This is one of the major advantages of a Roth over a traditional IRA — your money grows completely tax-free at both the federal and state level.

Some states do not have an income tax at all, so this does not matter to residents there. But for residents of states with income tax, the Roth IRA offers a real benefit: no state tax on withdrawals, ever.

Frequently Asked Questions

Can I withdraw my contributions without paying tax?

Yes. Your contributions can be withdrawn at any time, at any age, with no tax and no penalty. The IRS does not tax money you already paid tax on when you earned it. Only earnings are subject to the age and five-year rules.

What if I withdraw earnings before five years have passed?

You owe income tax on the earnings at your regular tax rate, plus a 10% early withdrawal penalty. The penalty applies only to the earnings portion, not to your contributions. Some exceptions exist for disability, first-time home purchases, and certain education or medical expenses.

Does the five-year rule reset if I open a second Roth IRA?

No. The five-year clock is tied to your first Roth IRA opening date, not to individual accounts. Once five tax years have passed since you opened your first Roth, the rule is satisfied for all your Roth accounts, even ones you opened later.

Do I owe taxes on a Roth IRA conversion?

You owe income tax on the amount converted in the year you convert it, because you are moving pre-tax money (from a traditional IRA) into a Roth. The converted amount itself can be withdrawn anytime without penalty, but earnings on that conversion follow the five-year rule.

Are Roth IRA withdrawals reported to the IRS?

Your Roth IRA custodian reports distributions to the IRS on Form 5498-R. You do not usually owe tax on these distributions if you follow the rules, but you may need to report them on your tax return depending on your situation. A tax professional can advise you on your specific withdrawal.