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

The whole point of a Roth IRA is that your investment gains grow tax-free. When your stocks, bonds, or mutual funds go up in value inside the account, you pay no federal income tax on those gains—not when they happen, and not when you take the money out. This is different from a traditional IRA, where gains are taxed as ordinary income when you withdraw them.

The catch is that this tax-free treatment only applies if you withdraw the money correctly. If you take money out before age 59½, or if you haven't held the account for at least five years, the gains portion of your withdrawal gets taxed as ordinary income, and you may also owe a 10% penalty. The rules are specific about what counts as a valid withdrawal.

Key Takeaways

  • Investment gains inside a Roth IRA are never taxed by the federal government, whether they grow or when you withdraw them, as long as you follow withdrawal rules.
  • A valid withdrawal requires you to be at least 59½ years old and to have held the account for at least five tax years—these are separate requirements.
  • If you withdraw gains before meeting both conditions, those gains are taxed as ordinary income and subject to a 10% early withdrawal penalty.
  • Contributions (the money you put in) can be withdrawn anytime without tax or penalty, but gains cannot be separated from contributions in your withdrawal.
  • The five-year rule applies per account, so opening a new Roth IRA restarts the clock on that specific account.

What "tax-free" actually means in a Roth IRA

A Roth IRA grows tax-free, meaning you do not file a tax form or pay tax each year on the gains your investments make. If you own a stock mutual fund that gains 8% in a year, you owe nothing to the IRS that year. If it gains another 8% the next year, you still owe nothing. This compounds over decades without any tax drag.

This is the opposite of a taxable brokerage account, where you would owe tax on those gains each year, even if you did not sell anything. It is also different from a traditional IRA, where gains are not taxed while they sit in the account, but are taxed as ordinary income when you withdraw them.

The tax-free treatment in a Roth IRA applies only to gains—the increase in value. Your contributions (the money you deposited) are not taxed because you already paid tax on that income when you earned it. Gains are the part that would normally be taxable, and the Roth structure exempts them.

The five-year rule and age 59½ requirement

To withdraw gains tax-free, you must meet two separate conditions. First, you must be at least 59½ years old. Second, you must have held the Roth IRA for at least five tax years. Both must be true. If you are 60 but opened the account three years ago, you cannot withdraw gains tax-free yet. If you opened the account ten years ago but are only 50, you also cannot.

The five-year clock starts on January 1 of the tax year in which you opened the account. If you opened a Roth IRA in March 2024, the five-year period runs from January 1, 2024, through December 31, 2028. You can withdraw gains tax-free starting January 1, 2029, assuming you are also 59½ by then.

If you have multiple Roth IRAs, each account has its own five-year clock. Opening a second Roth IRA does not reset the five-year period on your first one, but it does start a new five-year period for the second account. This matters if you plan to withdraw from one account before the other.

What happens if you withdraw gains early

If you withdraw gains before age 59½ or before five years have passed, the IRS treats those gains as taxable income. You will owe federal income tax on them at your ordinary income tax rate, which could be 10%, 12%, 22%, or higher depending on your total income that year.

You will also owe a 10% early withdrawal penalty on the gains. This is separate from the income tax. So if you withdraw $5,000 in gains before meeting the requirements, and your tax rate is 22%, you would owe $1,100 in income tax plus $500 in penalty, for a total of $1,600 in federal tax.

Some exceptions exist to the 10% penalty—for example, if you become disabled, or if you withdraw to pay for a first home (up to $10,000 lifetime). But these exceptions do not waive the income tax on the gains. You still owe tax; you just avoid the penalty.

How the IRS treats contributions versus gains

Your contributions—the actual dollars you deposited into the Roth IRA—can be withdrawn anytime without tax or penalty. This is true even if you are young or the account is new. You already paid tax on this money when you earned it, so the IRS does not tax it again.

The problem is that the IRS does not let you pick and choose which dollars you withdraw. If your Roth IRA has $20,000 in contributions and $8,000 in gains, and you withdraw $10,000, the IRS assumes you are withdrawing a proportional mix: roughly $7,143 in contributions and $2,857 in gains. The gains portion is what gets taxed if you do not meet the age and five-year requirements.

This is called the pro-rata rule, and it applies across all your Roth IRAs combined. If you have two Roth accounts, the IRS treats them as one pool for purposes of figuring out what portion of your withdrawal is contributions versus gains.

Exceptions that let you withdraw gains early without penalty

The IRS allows penalty-free early withdrawal of gains in a few specific situations. If you become permanently disabled, you can withdraw gains without the 10% penalty (though you still owe income tax on them). If you are a first-time homebuyer, you can withdraw up to $10,000 in gains over your lifetime without the penalty, though again, income tax applies.

If you die, your beneficiary can withdraw gains from your Roth IRA without the 10% penalty, though they will owe income tax on the gains unless they are also 59½ and the account has been open five years. If you have significant medical expenses or health insurance costs while unemployed, you may also may have access to for penalty-free withdrawal, though the rules are narrow.

These exceptions are about the 10% penalty only. They do not waive the income tax on gains. You should verify with a tax professional whether your situation qualifies before withdrawing, because the IRS definitions are specific and mistakes can be costly.

State taxes on Roth IRA gains

Most states do not tax Roth IRA withdrawals, even if they tax other retirement income. However, a few states—including Pennsylvania, New Jersey, and Illinois—tax retirement income in certain ways. The rules vary by state and by the type of income.

If you live in a state with a state income tax, check your state's tax authority website or speak with a tax professional about how Roth IRA withdrawals are treated. Federal tax rules do not automatically apply to state tax, and some states have their own requirements.

Frequently Asked Questions

Do I have to pay tax on Roth IRA gains every year?

No. Gains inside a Roth IRA are never taxed annually, no matter how large they grow. You pay no tax until you withdraw the money, and even then, only if you withdraw before meeting the age and five-year requirements.

Can I withdraw my contributions without touching my gains?

You can withdraw your contributions anytime without tax or penalty, but the IRS does not let you separate contributions from gains in your withdrawal. If your account is 60% contributions and 40% gains, any withdrawal is treated as 60% contributions and 40% gains. The gains portion may be taxed if you do not meet the requirements.

What if I turn 59½ but my account is only four years old?

You still cannot withdraw gains tax-free. You must meet both conditions: age 59½ and five tax years of account ownership. You can withdraw your contributions without tax or penalty, but gains remain taxed until the five-year period ends.

If I have two Roth IRAs, do they each have their own five-year rule?

Each Roth IRA has its own five-year clock for when you opened it. However, for calculating what portion of a withdrawal is contributions versus gains, the IRS treats all your Roth IRAs as one account. This can complicate early withdrawals if your accounts are different ages.

Are Roth IRA gains taxed if I move the money to another account?

No. Moving money between Roth IRAs through a direct transfer or rollover does not trigger tax on gains. Tax only applies when you withdraw money to your own bank account and do not deposit it into another Roth IRA within 60 days.