Earnings in a Roth IRA are not taxed when you withdraw them, as long as you follow the account rules

The core answer is simple: money your investments earn inside a Roth IRA—dividends, interest, capital gains—stays tax-free when you take it out. You do not owe federal income tax on those earnings, ever, provided you withdraw them after age 59½ and have held the account for at least five tax years. This is the defining feature of a Roth IRA and the reason many people choose one.

The catch is that this tax-free treatment only applies if you follow the rules. Withdraw earnings before age 59½ or before the five-year clock runs out, and the IRS taxes those earnings as ordinary income. You may also face a 10% penalty on top of the tax. Your contributions—the money you put in yourself—can always come out tax-free and penalty-free, but earnings are different.

Understanding which withdrawals trigger tax and which do not matters because the IRS does not automatically know whether you are taking out contributions or earnings. You need to track this yourself or face an unexpected tax bill.

Key Takeaways

  • Earnings in a Roth IRA are never taxed at the federal level when withdrawn, as long as you are at least 59½ years old and the account has been open for five tax years.
  • Withdrawing earnings before age 59½ or before five years have passed triggers ordinary income tax plus a 10% penalty on the earnings portion only.
  • Your contributions can always come out tax-free and penalty-free, regardless of age or account age, because you already paid tax on that money.
  • The IRS uses a pro-rata rule if you have both traditional and Roth IRAs, meaning you cannot isolate Roth earnings to avoid tax on early withdrawals.

How the five-year rule works

The five-year clock starts on January 1 of the tax year you first contribute to any Roth IRA, not when you open the account. If you open a Roth IRA on December 15, 2024, and make your first contribution that same year, the five-year period runs from January 1, 2024, through December 31, 2028. You can withdraw earnings tax-free starting January 1, 2029, provided you are also 59½ or older by then.

This rule applies per person, not per account. If you have multiple Roth IRAs, they all share the same five-year clock. Opening a second Roth IRA does not reset the timer.

The five-year rule is separate from the age requirement. You must satisfy both conditions—five years must have passed and you must be 59½—for earnings to come out completely tax-free. If you meet the five-year rule but are only 45, earnings are still taxable and subject to penalty if you withdraw them.

What happens if you withdraw earnings early

Withdrawing earnings before age 59½ or before five years have passed triggers two costs: ordinary income tax on the earnings amount, plus a 10% penalty on that same amount. The penalty applies only to the earnings portion, not to your contributions.

Example: You contribute $7,000 to a Roth IRA at age 35. After three years, the account grows to $9,500 (your $7,000 contribution plus $2,500 in earnings). You withdraw $9,500. The IRS taxes and penalizes only the $2,500 earnings. Your $7,000 contribution comes out clean. If you are in the 22% tax bracket, you owe $550 in tax on the earnings ($2,500 × 0.22) plus $250 in penalty ($2,500 × 0.10), for a total of $800.

The IRS does not automatically know which part of your withdrawal is contributions and which is earnings. You must track this using the order-of-withdrawal rule: contributions come out first, then earnings. Keep records of every contribution you make so you can prove how much is non-taxable when you withdraw.

Exceptions that avoid the early withdrawal penalty

The 10% penalty does not apply in certain situations, even if you withdraw earnings before 59½. The tax still applies, but the penalty is waived. These exceptions include disability, medical expenses over 7.5% of your adjusted gross income, health insurance premiums while unemployed, and first-time home purchase (up to $10,000 lifetime).

Substantially equal periodic payments (SEPP) also avoid the penalty if you set up a specific withdrawal schedule and follow it exactly. This is a complex calculation, and breaking the schedule triggers penalties retroactively, so it requires careful planning.

Even with these exceptions, you still owe income tax on the earnings. The penalty is waived, but the tax bill remains. Contributions always come out penalty-free and tax-free regardless of age or reason.

The pro-rata rule if you have both Roth and traditional IRAs

If you own both a Roth IRA and a traditional IRA (or SEP-IRA or SIMPLE IRA), the IRS treats them as one pool for early withdrawal purposes. This is the pro-rata rule, and it prevents you from withdrawing only Roth earnings while leaving traditional IRA money untouched.

The rule works like this: the IRS calculates what percentage of your combined IRA balance is pre-tax money (from traditional IRAs) and what percentage is after-tax money (from Roth contributions). When you withdraw from a Roth IRA, that same percentage of the withdrawal is treated as coming from pre-tax money, which is taxable.

Example: You have a $50,000 traditional IRA and a $20,000 Roth IRA (which includes $15,000 in contributions and $5,000 in earnings). Your combined balance is $70,000. Pre-tax money makes up $50,000 ÷ $70,000, or about 71%. If you withdraw $10,000 from the Roth, the IRS treats about $7,100 as coming from pre-tax sources (taxable) and $2,900 as coming from after-tax sources (your contributions, tax-free). This applies even though you withdrew from the Roth account itself.

The pro-rata rule does not apply if you have no traditional IRAs. It also does not apply to employer plans like 401(k)s, which are treated separately. Rolling a traditional IRA into a 401(k) before a Roth conversion can help you avoid the pro-rata rule, though this requires careful timing and coordination with your employer plan.

Roth conversions and the pro-rata rule

If you convert money from a traditional IRA to a Roth IRA, the pro-rata rule applies to the conversion itself. You cannot convert only the pre-tax gains while leaving the basis behind. The IRS calculates the taxable portion of the conversion based on your total IRA balance, including all traditional and SEP and SIMPLE IRAs you own.

This is why some people do a "backdoor Roth" conversion in stages: they roll their traditional IRA into a 401(k) first (if their employer plan allows it), which removes it from the pro-rata calculation, then convert a smaller amount to a Roth. The conversion is taxable based only on the remaining IRA balance, not the money now in the 401(k).

Conversions are taxable in the year you make them, regardless of whether you have held the Roth for five years. The five-year rule applies only to earnings, not to converted amounts. Converted money can be withdrawn tax-free after five years, but the earnings on that converted money follow the standard five-year and age 59½ rules.

How to track contributions and earnings

The IRS does not send you a statement showing how much of your Roth balance is contributions versus earnings. You must track this yourself using Form 8606, which you file with your tax return whenever you make a non-deductible contribution to a traditional IRA or convert to a Roth.

Keep a spreadsheet or document listing every contribution you make to every Roth IRA you own, the year you made it, and the amount. When you withdraw, subtract contributions first (in the order you made them) to determine how much is earnings. Your brokerage statement shows the total balance but not the breakdown.

If you cannot prove how much you contributed, the IRS assumes the entire withdrawal is earnings, which means the entire amount is taxable and subject to penalty if you are under 59½. Keeping records is the only way to protect yourself.

Frequently Asked Questions

Can I withdraw my earnings tax-free if I am 59½ but the account is only three years old?

No. You must satisfy both conditions: age 59½ and five tax years since your first Roth contribution. If only one condition is met, earnings are taxable and subject to penalty. Contributions can come out anytime, but earnings cannot.

What if I do not know how much I contributed to my Roth IRA?

Contact your brokerage and ask for a contribution history. If you cannot find records, the IRS assumes your entire withdrawal is earnings, which triggers tax and penalty. Reconstructing old tax returns or Form 8606 filings may help prove your contributions.

Does the five-year rule reset if I roll over money from another Roth IRA?

No. A rollover does not restart the five-year clock. The clock is based on when you first contributed to any Roth IRA, not when you received a rollover. Rollovers between Roth IRAs do not create a new five-year period.

If I withdraw only contributions, do I owe tax on the earnings left behind?

No. Earnings stay in the account and continue to grow tax-free. You owe tax only on earnings you actually withdraw. Leaving earnings in the account does not trigger any tax or penalty.

Does the pro-rata rule apply if my traditional IRA is at a different brokerage?

Yes. The IRS counts all traditional IRAs, SEP-IRAs, and SIMPLE IRAs you own, regardless of where they are held. You cannot avoid the pro-rata rule by splitting accounts across different institutions.