Roth IRA earnings and withdrawals are tax-free under specific conditions

A Roth IRA is not entirely tax-free, but the tax treatment is different from a traditional IRA. Money you contribute (the amount you put in) comes out tax-free anytime. Earnings (the growth on your money) come out tax-free 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 tax years. If you withdraw earnings before meeting both conditions, you pay income tax on those earnings plus a 10% early withdrawal penalty.

The five-year rule applies to each Roth account separately. If you open a new Roth IRA, that account's five-year clock starts over. The age requirement (59½) is the same for all your Roth accounts combined — once you turn 59½, the age part of the rule is satisfied for every Roth you own.

Key Takeaways

  • Contributions (money you put in) always come out tax-free and penalty-free, no matter your age or how long the account has been open.
  • Earnings (investment growth) come out tax-free only if you are at least 59½ and the account has been open for five tax years.
  • Withdrawing earnings before age 59½ or before five years triggers income tax on the earnings plus a 10% penalty, unless an exception applies.
  • Certain hardships — disability, medical expenses, first-time home purchase — may waive the 10% penalty but not the income tax on earnings.

The difference between contributions and earnings

Your Roth IRA holds two types of money: what you put in (contributions) and what your investments earned (earnings). The IRS treats them differently for tax purposes. Contributions are always yours to withdraw without tax or penalty. Earnings are the interest, dividends, and capital gains your money generated inside the account.

When you withdraw, the IRS assumes you take contributions first. So if your account has $10,000 in contributions and $2,000 in earnings, and you withdraw $8,000, that $8,000 is treated as contributions and comes out tax-free. Only when you withdraw more than your total contributions do you start pulling out earnings, which triggers the tax and penalty rules.

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 ordinary tax rate. You also owe a 10% early withdrawal penalty on the earnings. For example, if you withdraw $2,000 in earnings and you are in the 22% tax bracket, you pay $440 in income tax plus $200 in penalty — a total of $640 in taxes and penalties on that $2,000.

The five-year rule is separate from the age rule. Even if your account has been open for ten years, if you are only 45 years old and you withdraw earnings, you still pay the 10% penalty. Both conditions must be met: age 59½ and five years open.

Exceptions that waive the 10% penalty

The IRS allows you to withdraw earnings without the 10% penalty in a few situations, though you still pay income tax on the earnings. These exceptions include disability, medical expenses over 7.5% of your adjusted gross income, health insurance premiums while unemployed, and a first-time home purchase (up to $10,000 lifetime). Substantially equal periodic payments (SEPP) also waive the penalty if you follow a specific formula.

These exceptions do not waive the five-year rule. If your account has been open for only two years and you use an exception, you still owe income tax on the earnings you withdraw. The exception only removes the 10% penalty.

The five-year rule for each account

Each Roth IRA you open has its own five-year clock. If you open a Roth in 2024, that account's five-year period ends in 2029. If you open a second Roth in 2026, that second account's five-year period ends in 2031. You cannot combine the five years across multiple accounts.

The five-year rule applies to the account itself, not to your age or how long you have been saving. A 70-year-old who opens their first Roth IRA must still wait five years before earnings come out tax-free, even though they are well past 59½.

Roth conversions and the pro-rata rule

If you convert money from a traditional IRA to a Roth IRA, that converted amount has its own five-year rule. You can withdraw the converted amount without penalty after five years, but only if you are 59½. Earnings on the converted money follow the same two-condition rule as regular contributions.

The pro-rata rule complicates conversions if you have both traditional and Roth IRAs. When you convert, the IRS treats all your traditional IRAs as one pool for tax purposes. If that pool contains pre-tax money, a portion of your conversion is taxable. This rule does not change the five-year clock, but it does determine how much of the conversion is taxed in the year you convert.

Tax-free growth inside the account

While your money stays inside the Roth IRA, all growth is tax-free. You do not pay tax on dividends, interest, or capital gains each year. This is true regardless of your age or how long the account has been open. The tax-free growth is one of the main reasons people use Roth accounts — the longer money sits inside, the more it grows without annual tax bills.

This tax-free growth applies only to money inside the account. Once you withdraw, the tax rules above apply to what you take out.

Frequently Asked Questions

Can I withdraw my contributions anytime without tax or penalty?

Yes. Contributions always come out tax-free and penalty-free, no matter your age or how long the account has been open. The IRS treats withdrawals as contributions first, so you can access your own money without consequence.

What if I need money before age 59½ but my account is past five years?

You can withdraw contributions tax-free and penalty-free. If you withdraw earnings, you owe income tax on them plus the 10% penalty, unless a specific exception applies (disability, medical expenses, first-time home purchase, etc.).

Do I have to pay taxes on Roth IRA earnings if I never withdraw them?

No. As long as the money stays in the account, you pay no tax on earnings, even if they grow for decades. Tax is due only when you withdraw the earnings.

If I convert a traditional IRA to a Roth, when can I withdraw it tax-free?

Converted amounts have their own five-year rule. You can withdraw the converted amount after five years if you are 59½. Earnings on the converted money follow the same two-condition rule as regular contributions.

What is the pro-rata rule and how does it affect my conversion?

If you have both traditional and Roth IRAs, the IRS treats all traditional IRAs as one pool when you convert. If that pool contains pre-tax money, a portion of your conversion is taxable in the year you convert. The rule does not change the five-year clock but determines your tax bill for the conversion year.