Roth IRAs are not taxed on the money you withdraw in retirement, but the rules around taxes are more detailed than that

A Roth IRA works backwards from a traditional IRA on taxes. You put money in after paying income tax on it, the account grows tax-free, and then you take money out in retirement without owing federal income tax on any of it — including the earnings. The trade-off is that you cannot deduct your contributions from your taxes in the year you make them, the way you can with a traditional IRA.

The tax advantage of a Roth IRA is real, but it only applies if you follow the withdrawal rules. If you take money out before you are 59½ or before the account has been open for five years, you may owe taxes and penalties on the earnings portion. The contributions themselves — the money you actually put in — can always come out tax-free and penalty-free, no matter your age or how long the account has existed.

Key Takeaways

  • You pay income tax on the money before it goes into a Roth IRA, so contributions are never taxed again when you withdraw them.
  • Investment earnings inside a Roth IRA grow tax-free and are not taxed when you withdraw them in retirement, as long as you follow the five-year rule and are at least 59½.
  • Withdrawing earnings before age 59½ or within five years of opening the account triggers income tax and a 10 percent penalty on the earnings portion only.
  • Your contributions can be withdrawn at any time without tax or penalty, even if you are under 59½ or the account is brand new.
  • Roth IRAs have no required minimum distributions during your lifetime, so you can leave the money untouched and let it grow tax-free.

What happens to contributions versus earnings

A Roth IRA holds two types of money: contributions (what you put in) and earnings (what the investments made). The tax treatment is completely different for each.

Contributions are the dollars you deposit yourself. Because you already paid income tax on this money before it entered the account, you can withdraw it anytime, at any age, without owing taxes or penalties. This is true even if you are 25 years old and the account opened last month. The IRS considers this money yours to take back.

Earnings are the gains from investments — interest, dividends, capital gains. These have never been taxed. If you withdraw earnings before meeting the age and time requirements, you owe income tax on them plus a 10 percent early withdrawal penalty. If you wait until retirement and follow the rules, you owe nothing.

The five-year rule and why it matters

Even if you are 59½ or older, you cannot withdraw earnings tax-free unless the Roth IRA has been open for at least five calendar years. This is called the five-year holding period, and it applies to each Roth IRA separately.

The five-year clock starts on January 1 of the year you open the account. If you open a Roth IRA on December 15, 2024, the five-year period runs through December 31, 2029. You can withdraw earnings tax-free starting January 1, 2030, as long as you are 59½ by then.

If you convert money from a traditional IRA to a Roth IRA, a separate five-year rule applies to the converted amount. You can withdraw your original contributions anytime, but the converted funds have their own five-year holding period before earnings on that conversion are tax-free.

Age 59½ and the early withdrawal penalty

The IRS allows you to withdraw earnings tax-free starting at age 59½, but only if the account has been open for five years. If you are younger than 59½, any earnings you withdraw are subject to income tax plus a 10 percent penalty.

There are a few exceptions to the 10 percent penalty — you can withdraw earnings without the penalty (though you still owe income tax) if you are disabled, if you are a first-time homebuyer taking up to $10,000 lifetime, or if you are taking distributions after the account holder's death. These exceptions do not waive the income tax, only the penalty.

Contributions, again, are never subject to the penalty and never taxed, regardless of your age or how long the account has been open.

No required minimum distributions during your lifetime

Traditional IRAs force you to start taking money out at age 73 (as of 2023; this age changes over time). Roth IRAs have no such requirement. You can leave the money in the account for your entire life, letting it grow tax-free, and never take a withdrawal if you do not need it.

This makes a Roth IRA useful for people who want to leave money to heirs. Your beneficiaries will inherit the account and can withdraw contributions tax-free. They will owe income tax on earnings, but the account itself is not taxed as part of your estate.

State and local taxes on Roth IRAs

Federal income tax is waived on Roth IRA withdrawals, but state and local taxes vary. Most states do not tax retirement income, including Roth IRA withdrawals, but some do. A few states tax all income regardless of source.

Check your state's tax rules or speak with a tax professional if you live in a state with income tax. The federal tax advantage of a Roth IRA is the same everywhere, but your state's treatment can change the overall picture.

Frequently Asked Questions

Do I owe taxes when I convert a traditional IRA to a Roth IRA?

Yes. When you convert, you owe income tax on the amount converted in that tax year, as if you had withdrawn it. You do not owe the 10 percent early withdrawal penalty, but the income tax is due. The converted money then enters the Roth IRA and grows tax-free going forward.

What if I withdraw money and then put it back?

You can return a withdrawal to a Roth IRA within 60 days as a rollover, and it is treated as if the withdrawal never happened for tax purposes. This must happen within the 60-day window. After 60 days, the withdrawal is permanent and taxable (if it included earnings).

Can I withdraw my contributions if I am under 59½?

Yes. Your contributions can be withdrawn tax-free and penalty-free at any age. Only earnings are subject to the age and time restrictions. If you are unsure whether a withdrawal is a contribution or earnings, contact your Roth IRA provider for a breakdown.

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

You do not report Roth IRA contributions or withdrawals on your federal tax return in most cases. If you convert a traditional IRA to a Roth, you report the conversion on Form 8606. Your provider sends you a Form 5498 for record-keeping, but you do not file it with the IRS.