Most Roth IRA withdrawals are tax-free, but not all

The short answer: money you withdraw from a Roth IRA after age 59½ and after the account has been open for five years comes out tax-free. But if you withdraw earnings (the money your investments made) before you meet both those conditions, the IRS taxes that part as ordinary income and may add a 10 percent penalty on top.

The reason is simple. You already paid income tax on the money you put into a Roth IRA. The government lets you take that contribution back anytime, tax-free. The earnings, though — the growth — have never been taxed. Those are what the IRS watches.

Key Takeaways

  • Contributions (the money you deposited) can be withdrawn at any time, tax-free and penalty-free, regardless of your age.
  • Earnings (investment gains) withdrawn before age 59½ or before five years of account ownership trigger income tax plus a 10 percent early withdrawal penalty.
  • The five-year rule counts from January 1 of the year you made your first Roth contribution, not from each individual deposit.
  • Certain hardships — disability, medical expenses, first-time home purchase up to $10,000 lifetime — may let you withdraw earnings without the 10 percent penalty, though income tax still applies.

The difference between contributions and earnings

Your Roth IRA holds two types of money: what you put in (contributions) and what that money earned (earnings). The IRS tracks these separately, and they have different tax rules.

Contributions are yours to take out whenever you want. You paid tax on that income already when you earned it. The IRS does not tax it again. This is true even if you are 30 years old and the account has been open for only six months.

Earnings are different. If you withdraw them before age 59½, or if your account has not been open for five years, you owe income tax on the amount you withdraw. You also owe a 10 percent penalty on top of the tax. If you withdraw $5,000 in earnings too early and you are in the 22 percent tax bracket, you pay $1,100 in tax plus $500 in penalty — $1,600 total.

How the five-year rule works

The five-year clock starts on January 1 of the year you make your first Roth contribution. It does not restart with each new deposit. If you opened a Roth IRA in March 2020 and made your first contribution then, the five years end on January 1, 2025. After that date, you can withdraw earnings without the early withdrawal penalty (though you still need to be 59½ to avoid income tax).

The rule applies to the account, not to the money. If you have multiple Roth IRAs, each one has its own five-year clock. But if you roll over a Roth IRA from one provider to another, the five-year period does not reset — it carries forward from the original account.

If you convert a traditional IRA to a Roth IRA, that conversion starts its own five-year clock. Conversions and regular contributions are treated separately for this purpose. This matters because it affects when you can withdraw conversion money without penalty.

Withdrawals that avoid the 10 percent penalty

Even if you are under 59½ and the account is less than five years old, the IRS lets you withdraw earnings without the 10 percent penalty in specific situations. Income tax still applies — the penalty is what disappears.

The main exceptions are: you become disabled (as defined by Social Security); you have unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income; you are a first-time homebuyer taking out up to $10,000 lifetime; you are paying for may have access to education expenses; or you are taking substantially equal periodic payments based on your life expectancy.

These exceptions are narrow. "First-time homebuyer" means you have not owned a home in the past two years. "may have access to education expenses" means tuition, fees, books, and room and board for you, your spouse, or your children at an accredited school. You cannot use the exception to pay off student loans or to cover living expenses that are not directly tied to school.

What happens if you cannot tell contributions from earnings

If you have made many deposits over years and your investments have grown, you may not know exactly how much is contribution and how much is earnings. The IRS has a formula to figure this out, and it is not in your favor.

If you have multiple Roth IRAs, the IRS treats them as one account for this calculation. If you have $50,000 across three Roth IRAs and $30,000 of that is earnings, then 60 percent of any withdrawal you take is treated as earnings, even if you withdraw from the account with the lowest earnings.

Your Roth IRA provider should send you a statement showing contributions and earnings. If you are unsure, ask them for a breakdown before you withdraw. This is especially important if you are considering an early withdrawal and want to know whether you will face tax and penalty.

Inherited Roth IRAs and withdrawal rules

If you inherit a Roth IRA from someone other than your spouse, the tax rules change. You can withdraw contributions tax-free at any time. But earnings follow a different timeline depending on how long the original owner had the account open.

If the original owner had the account open for five years or more before they died, you can withdraw earnings tax-free as long as you take the money out by December 31 of the year that contains the tenth anniversary of their death. If the account was open for less than five years, you owe income tax on the earnings, though not the 10 percent penalty.

If you inherit from your spouse, you can treat the Roth IRA as your own. The five-year rule and age 59½ rule apply as if you had opened it yourself. This is usually the best option, but you have other choices — talk to a tax professional before you decide.

Frequently Asked Questions

Can I withdraw my contributions without reporting it to the IRS?

Yes. Contributions are not taxable income, so you do not report them on your tax return. Your Roth IRA provider tracks contributions separately and reports only earnings on the forms sent to the IRS. You can withdraw contributions anytime without penalty or tax.

What if I withdraw earnings and I am over 59½ but the account is less than five years old?

You owe income tax on the earnings but not the 10 percent penalty. The penalty is waived because you met the age requirement. The five-year rule still applies to the tax, though. Once the account reaches five years old, future earnings withdrawals are tax-free.

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

If you withdraw only contributions, no. If you withdraw earnings and owe tax or penalty, your Roth IRA provider sends Form 5498-R to the IRS, and you report it on Form 1040. A tax professional can help you figure out what you owe based on your specific withdrawal.

What if I put money in a Roth IRA but I made too much income that year?

If your income was too high, the contribution is not allowed. You can withdraw it, and the earnings it made, without penalty. The earnings are taxable as income for that year. This is called a "return of excess contribution." Your provider can help you process this if you discover the error.

Can I avoid the tax by rolling the withdrawal into another retirement account?

No. A Roth IRA withdrawal is a withdrawal — it does not matter where the money goes after. If you owe tax or penalty on the withdrawal, rolling it into a 401(k) or traditional IRA does not change that. The tax is owed in the year you take the money out.