Roth IRA gains are not taxed when you withdraw them, as long as you follow the withdrawal rules

The core feature of a Roth IRA is that investment gains — the money your account earns through interest, dividends, or stock price increases — are not subject to federal income tax when you take them out. This is different from a traditional IRA, where gains are taxed as ordinary income when withdrawn. With a Roth, you pay tax on the money you put in (called contributions), but the growth itself stays tax-free for life, provided you meet two conditions: your account has been open for at least five tax years, and you are at least 59½ years old when you withdraw.

If you withdraw gains before meeting both conditions, the gains portion of your withdrawal is taxed as ordinary income, and you may also owe a 10 percent early withdrawal penalty on that gains portion. The contributions themselves can always be withdrawn tax-free and penalty-free, regardless of your age or how long the account has been open. This distinction between contributions and gains is the reason the IRS requires you to track them separately.

Key Takeaways

  • Gains in a Roth IRA are never taxed federally if you withdraw them after age 59½ and your account has been open for at least five tax years.
  • Contributions (the money you deposited) can be withdrawn at any time, tax-free and penalty-free, regardless of age or account age.
  • If you withdraw gains before age 59½ or before five years have passed, those gains are taxed as ordinary income and subject to a 10 percent penalty.
  • The IRS tracks contributions and gains separately, so you will need records showing how much you contributed versus how much your account earned.
  • Some exceptions exist to the early withdrawal penalty (such as first-time home purchase or disability), but the five-year rule still applies to gains.

The five-year rule and how it applies to your account

The five-year rule is a calendar requirement, not a rule based on your age. Your Roth IRA account must have been open for at least five tax years before you can withdraw gains tax-free. The clock starts on January 1 of the year you opened the account, regardless of when during that year you actually funded it. If you opened your Roth IRA on December 15, 2024, the five-year period runs from January 1, 2024, through December 31, 2028. After that, any withdrawal of gains is tax-free (assuming you are also 59½ or older).

If you have multiple Roth IRA accounts, the five-year rule applies to your first Roth IRA account overall, not to each account separately. This means if you opened one Roth IRA in 2020 and another in 2024, both accounts satisfy the five-year rule once 2025 ends, because the clock started with your first account in 2020. The rule is tied to you as an individual, not to each separate account you own.

Contributions versus gains: what the IRS distinguishes

The IRS treats contributions and gains as two separate buckets within your Roth IRA. Contributions are the dollars you deposited yourself. Gains are everything else: interest earned, dividends received, and increases in the value of stocks or funds you own. When you withdraw money, the IRS assumes you withdraw contributions first, then gains. This matters because contributions come out tax-free and penalty-free no matter what, while gains are subject to tax and penalty if you do not meet the age and five-year requirements.

You must keep records of every contribution you make, including the year and amount. The IRA custodian (your bank, brokerage, or investment firm) will send you a Form 5498 each year showing contributions you made, but you are responsible for maintaining your own records as well. If you cannot document how much you contributed, the IRS will assume a larger portion of your withdrawal is gains, which could result in unexpected tax liability. Save your contribution confirmations and any statements showing your account balance at the time you opened it.

What happens if you withdraw gains early

If you withdraw gains before your account is five years old or before you turn 59½, the gains portion is taxed at your ordinary income tax rate. This means if you are in the 22 percent federal tax bracket, you owe 22 percent of the gains withdrawn. You also owe a 10 percent early withdrawal penalty on the gains portion only, not on the contributions portion. The penalty is calculated separately and added to your tax bill.

Example: You opened a Roth IRA in 2024 and contributed $7,000. By 2025, your account is worth $8,500 (a $1,500 gain). If you withdraw $8,500 at age 45, the first $7,000 comes out tax-free and penalty-free. The remaining $1,500 is treated as a gain withdrawal. You owe income tax on $1,500 plus a 10 percent penalty ($150), for a total tax hit of roughly $480 to $510 depending on your tax bracket. The tax and penalty are reported on your annual tax return.

Exceptions to the early withdrawal penalty on gains

The IRS allows penalty-free early withdrawal of gains in a few specific situations, though the five-year rule still applies. These exceptions include first-time home purchase (up to $10,000 lifetime), disability, medical expenses exceeding 7.5 percent of your adjusted gross income, and health insurance premiums paid while unemployed. Even if you may have access to for one of these exceptions, you still owe income tax on the gains withdrawn if your account is not yet five years old.

If you are withdrawing for a first-time home purchase and your account is only three years old, you avoid the 10 percent penalty but still owe income tax on the gains portion. The five-year rule is separate from the penalty exceptions and applies in all cases. You should verify with a tax professional whether your situation qualifies for an exception before withdrawing, because the rules are specific and mistakes can be costly.

How Roth conversions affect the five-year rule

If you convert money from a traditional IRA to a Roth IRA, that converted amount is subject to a separate five-year rule. The converted funds themselves must sit in the Roth for five years before you can withdraw them penalty-free, even if your original Roth IRA account is older than five years. This is called the conversion five-year rule, and it applies to each conversion separately based on the year the conversion occurred.

Example: You opened a Roth IRA in 2020 and it is now five years old. In 2025, you convert $50,000 from a traditional IRA to this same Roth. The $50,000 conversion is subject to its own five-year clock starting in 2025. You can withdraw your original contributions and the gains on them tax-free (because the account is five years old and you are 59½), but if you withdraw the converted $50,000 before 2030, you owe a 10 percent penalty on it, even though the account itself is old enough. Keep separate records of conversion amounts and dates.

State taxes and Roth IRA gains

Roth IRA gains are exempt from federal income tax under the conditions described above, but state tax treatment varies. Most states do not tax Roth IRA withdrawals, but a few states tax all retirement income regardless of the source. If you live in a state with an income tax, check your state's rules or consult a tax professional to understand whether state tax applies to your Roth withdrawals.

Federal tax exemption does not automatically mean state tax exemption. States like New York, Vermont, and a handful of others may tax retirement account withdrawals even when the federal government does not. Your state's tax department website or a local tax professional can tell you whether your state taxes Roth distributions, and if so, at what rate.

Frequently Asked Questions

Do I owe tax on Roth IRA gains while the money is still in the account?

No. You owe no tax on gains while they remain in the account, regardless of how large they grow. Tax is only triggered when you withdraw money. This is one of the main advantages of a Roth: your money compounds tax-free for decades if you leave it untouched.

What if I withdraw only the gains and leave the contributions in?

The IRS assumes you withdraw contributions first, so you cannot selectively withdraw only gains. If your account has $10,000 in contributions and $5,000 in gains, and you withdraw $8,000, the IRS treats the first $8,000 as contributions. To withdraw gains, you must withdraw enough to exhaust all contributions first, or the IRS will treat the withdrawal as coming from contributions regardless of your intent.

Can I avoid the five-year rule by rolling my Roth to a new account?

No. Rolling or transferring a Roth IRA to a different custodian does not reset the five-year clock. The clock is based on when you first opened any Roth IRA, not on the age of your current account. Moving money between accounts does not change the tax treatment of gains.

Do Roth IRA gains count as income for other purposes?

Roth IRA withdrawals do not count as income for federal tax purposes, but some state programs and means-tested benefits may treat them differently. If you are receiving Medicaid, SNAP, or other need-based assistance, check with the program administrator before withdrawing, as the withdrawal might affect your benefits even though it is not taxable income.