The short answer: it depends on what you're taking out and how long you've had the account

Money you withdraw from a Roth IRA falls into two categories: your contributions (the money you put in) and your earnings (the growth that happened inside the account). Contributions come out tax-free anytime. Earnings come out tax-free only if you meet two conditions: you're 59½ or older, and the account has been open for at least five years. If you take earnings out before then, you owe income tax on them plus a 10 percent early withdrawal penalty in most cases.

The reason this matters is that the IRS treats Roth accounts differently from traditional IRAs. With a Roth, you already paid income tax on the money before it went in. The whole point is that it grows tax-free and comes out tax-free later. The IRS just wants to make sure you follow the rules about when you can take the earnings without a penalty.

Key Takeaways

  • Your contributions to a Roth IRA can always come out tax-free and penalty-free, no matter your age or how long you've had the account.
  • Earnings (investment growth) come out tax-free only if you are 59½ or older and have held the account for at least five years.
  • If you withdraw earnings before 59½, you owe income tax on them plus a 10 percent penalty, unless an exception applies.
  • The IRS tracks contributions and earnings separately, so you need to know which is which before you withdraw.

How the IRS tells contributions apart from earnings

When you take money out of a Roth IRA, the IRS assumes you withdraw contributions first. This is called the ordering rule. So if you put in $5,000 and it grew to $6,500, and you withdraw $5,000, that entire withdrawal is treated as a contribution coming out tax-free.

But if you withdraw $6,500 or more, the IRS considers the first $5,000 a contribution and the remaining $1,500 an earnings withdrawal. That $1,500 is what gets taxed and penalized if you don't meet the age and five-year rules.

The five-year rule is tied to the account itself, not to each contribution. If you opened your first Roth IRA in 2019, any Roth IRA you own now counts as having been open since 2019 for the five-year test. This matters if you roll money from one Roth to another or open multiple Roth accounts.

When you can take earnings out without a penalty

You avoid the 10 percent penalty on earnings if you meet both conditions: you are 59½ or older and the account has been open for five tax years. "Five tax years" means five calendar years, starting with the year you first contributed to any Roth IRA. If you opened a Roth in 2019, the five-year period ends on January 1, 2024.

Once you clear both hurdles, you can withdraw earnings tax-free as well as penalty-free. You still owe income tax on the earnings if you withdraw them before 59½, even if the account is five years old. And you still owe the 10 percent penalty if you're under 59½, even if the account is five years old. Both conditions have to be met.

Exceptions that waive the 10 percent penalty

The IRS allows you to withdraw earnings without the 10 percent penalty in a few specific situations, even if you're under 59½. You still owe income tax on the earnings, but not the penalty. These exceptions include disability, medical expenses that exceed 7.5 percent of your adjusted gross income, health insurance premiums while you're unemployed, and a first-time home purchase (up to $10,000 lifetime).

There is also an exception for substantially equal periodic payments, sometimes called SEPP or a 72(t) distribution. This is a complex calculation that lets you take regular withdrawals before 59½ without the penalty, but you have to follow strict rules about the amount and frequency. If you break the pattern, you owe back penalties and interest.

Even with these exceptions, the five-year rule still applies to earnings. If your account is less than five years old, you cannot take earnings out tax-free under any exception. The penalty goes away, but the income tax does not.

What happens if you inherit a Roth IRA

If someone leaves you a Roth IRA, the five-year rule works differently. The five-year period is based on when the original owner opened their Roth, not when you inherited it. If they opened it in 2015 and you inherit it in 2023, the account is already past the five-year mark from your perspective.

However, the rules about when you have to take money out are stricter for inherited accounts. Most non-spouse beneficiaries must empty the account within ten years, depending on when the original owner died. The tax treatment of what you withdraw depends on whether the original owner had met the age and five-year requirements at the time of death.

How to find out what's contributions versus earnings

Your Roth IRA custodian (the bank or brokerage holding the account) keeps records of every contribution you made. When you request a withdrawal, ask them to provide a breakdown showing how much of your balance is contributions and how much is earnings. This is called a basis report or contribution history.

You can also track this yourself by keeping records of every contribution you made each year. Form 5498, which your custodian sends to you and the IRS each January, shows contributions for the prior year. If you have multiple Roth accounts, add up contributions across all of them.

If you do not have clear records and you withdraw money, the IRS will assume you withdrew earnings first if your total withdrawal exceeds your total contributions. This is the opposite of the ordering rule that normally applies. Having documentation protects you from this assumption.

State income tax on Roth withdrawals

Most states do not tax Roth IRA withdrawals at all, even if the federal government would. However, a few states tax retirement account withdrawals in certain situations. Check your state's tax rules or speak with a tax professional if you live in a state with an income tax and you are taking a large withdrawal.

Federal tax is what matters most for Roth withdrawals. If you owe federal income tax on earnings, you will owe it regardless of where you live. State tax is an additional layer that depends on your state's specific rules.

Frequently Asked Questions

Can I withdraw my contributions anytime without paying taxes?

Yes. Contributions come out tax-free and penalty-free at any age and at any time. The IRS considers them your own money since you already paid income tax on it before putting it in the Roth.

What if I need the money before I'm 59½ but my account is five years old?

If the account is five years old but you are under 59½, you can withdraw contributions tax-free and penalty-free. Earnings still owe income tax and the 10 percent penalty unless an exception applies, such as disability or a first-time home purchase.

Does the five-year rule reset if I roll my Roth to a different custodian?

No. The five-year period is tied to the account itself, not the custodian. If you move your Roth from one bank to another, the five-year clock keeps running from when you first opened any Roth IRA.

If I take out earnings and owe a penalty, how do I pay it?

The penalty is calculated on Form 5329, which you file with your tax return. You pay it as part of your total tax bill. If you owe the penalty, you cannot avoid it by putting the money back in the account.

What if I made a mistake and withdrew earnings I shouldn't have?

You can put the money back within 60 days in most cases, which is called a rollover. After 60 days, the withdrawal is final and you owe the tax and penalty. Speak with a tax professional if you made a withdrawal you now regret.