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

The core feature of a Roth IRA is that your earnings — the money your investments gain over time — come out tax-free in retirement. You do not owe federal income tax on those earnings when you withdraw them, and you do not owe it while the money sits in the account either. This is the opposite of a traditional IRA, where earnings are taxed as ordinary income when you take the money out.

The catch is that this tax-free treatment only applies if you meet two conditions: you must be at least 59½ years old, and your account must have been open for at least five tax years. If you withdraw earnings before meeting both conditions, you will owe income tax on those earnings plus a 10 percent early withdrawal penalty in most cases.

Your contributions — the money you put in yourself — always come out tax-free, regardless of your age or how long you have held the account. The IRS distinguishes between contributions and earnings, and only earnings face the tax and penalty rules.

Key Takeaways

  • Roth IRA earnings are never taxed when you withdraw them after age 59½ and the account has been open for five tax years.
  • Earnings withdrawn before age 59½ or within five years of opening the account are subject to income tax and usually a 10 percent penalty.
  • Your contributions always come out tax-free at any age, so you can distinguish between what you put in and what your investments earned.
  • The five-year rule is tied to the account itself, not to your age, so opening an account early matters even if you do not withdraw for decades.

How the five-year rule works

The five-year holding period starts on January 1 of the tax year in which you first contributed to any Roth IRA. This means if you open your first Roth IRA in March 2024 and contribute, the five-year clock starts January 1, 2024. By January 1, 2029, the five years are complete.

The rule applies to your Roth IRAs as a group, not to each account separately. If you have multiple Roth IRAs, they all share the same five-year start date. Converting money from a traditional IRA to a Roth IRA starts a separate five-year clock for that converted amount, but your regular contributions and the converted funds are tracked independently for withdrawal purposes.

Once the five years are up, you never have to worry about the rule again. Even if you do not touch the account for another 20 years, the five-year requirement stays satisfied.

The difference between contributions and earnings

When you withdraw from a Roth IRA, the IRS assumes you take out contributions first, then earnings. This matters because contributions always come out tax-free and penalty-free, no matter your age. If your account has $50,000 in contributions and $15,000 in earnings, and you withdraw $30,000, you are taking out $30,000 of contributions with no tax consequence.

You can find out how much you have contributed by looking at your IRA custodian statements or by checking IRS Form 8606, which tracks your Roth IRA basis (the total amount you have contributed over time). The custodian — your bank, brokerage, or investment firm — should also provide this information on request.

If you have made conversions from a traditional IRA to a Roth IRA, those converted amounts are treated as contributions for withdrawal purposes, but only after five years have passed since the conversion. During the first five years after a conversion, withdrawing the converted amount triggers the same tax and penalty rules as withdrawing earnings.

What happens if you withdraw earnings early

If you withdraw earnings before age 59½ or before the five-year period ends, you owe income tax on those earnings at your ordinary tax rate. You also owe a 10 percent early withdrawal penalty on the earnings, calculated as 10 percent of the amount withdrawn.

Example: You are 45 years old and have held your Roth IRA for three years. You withdraw $10,000, of which $3,000 is earnings. You owe income tax on the $3,000 at your tax bracket rate (let us say 22 percent, or $660) plus a 10 percent penalty ($300), for a total of $960 in taxes and penalties on that $3,000.

Some exceptions to the 10 percent penalty exist — for instance, if you are disabled, if you use the money for a first-time home purchase (up to $10,000 lifetime), or if you have significant medical expenses. Taxes still apply to the earnings even when the penalty is waived. You report the withdrawal and any penalty on your tax return.

State taxes on Roth IRA earnings

Most states do not tax retirement account withdrawals, including Roth IRA earnings, even if they tax other income. However, a handful of states — including Vermont, Minnesota, and a few others — tax IRA withdrawals as ordinary income. Your state tax treatment depends on where you live when you withdraw, not where you opened the account.

If you live in a state that taxes IRA withdrawals and you withdraw Roth IRA earnings before meeting the age and five-year requirements, you will owe state income tax on top of federal tax. Check your state revenue department website or speak with a tax preparer to understand your state's specific rules.

Roth conversions and the five-year rule

When you convert money from a traditional IRA or 401(k) to a Roth IRA, that converted amount is subject to a separate five-year rule. You cannot withdraw the converted funds without penalty until five years have passed since the conversion, even if you are over 59½.

The five-year clock for a conversion starts on January 1 of the year you convert. If you convert in June 2024, the five years run from January 1, 2024 to December 31, 2028. After that date, you can withdraw the converted amount penalty-free (though you still owe income tax on any earnings that accumulated after the conversion).

Regular contributions and converted amounts are tracked separately. You can withdraw regular contributions at any time without penalty, but converted amounts are locked until the five-year period ends or you reach 59½, whichever is later.

How to track your basis and plan withdrawals

Your IRA custodian sends you a statement each year showing contributions, earnings, and account value. Keep these statements in a file. When you plan to withdraw, contact your custodian and ask them to calculate your basis — the total amount you have contributed — so you know how much you can withdraw tax-free.

If you have made multiple conversions or have accounts at different institutions, tracking becomes more complex. The IRS requires you to report all your Roth IRA accounts together on Form 8606 when you file taxes. Many people work with a tax preparer or accountant to manage this, especially if they have made conversions or have accounts spread across multiple custodians.

Before you withdraw, confirm with your custodian whether you meet the five-year requirement and whether you are over 59½. Some custodians will flag whether a withdrawal triggers penalties; others will not. It is your responsibility to understand the rules and report correctly on your tax return.

Frequently Asked Questions

Can I withdraw my earnings at any age if I have held the account for five years?

No. You must be at least 59½ years old and have held the account for five tax years. Both conditions must be met. If you are 50 and your account is six years old, you still cannot withdraw earnings without tax and penalty.

Do I owe taxes on Roth IRA earnings while the money is still in the account?

No. Roth IRA earnings are never taxed while they sit in the account, no matter how much they grow. You only owe tax if you withdraw the earnings before meeting the age and five-year requirements.

What if I withdraw only my contributions and leave the earnings in the account?

You can do this at any time without tax or penalty. The IRS assumes you withdraw contributions first, so if you take out less than your total contributions, you are taking out only contributions. Your earnings stay in the account and continue to grow tax-free.

If I convert a traditional IRA to a Roth, do I owe tax on the conversion itself?

Yes. When you convert, you owe income tax on the amount converted in that tax year. This is separate from the five-year rule on withdrawals. The five-year rule applies only to withdrawals; the tax on conversion is due when you file your return for the year of the conversion.

Does my employer's Roth 401(k) follow the same five-year rule?

No. Roth 401(k) earnings are subject to different rules than Roth IRAs. Roth 401(k) earnings can be withdrawn tax-free after age 59½ if the plan has been in place for five years, but the five-year rule is tied to the plan, not the account. Consult your plan documents or employer for specifics.