Gains in a Roth IRA are not taxed when you withdraw them, as long as you follow the account rules
The money your Roth IRA earns—through interest, dividends, or investment growth—stays in the account tax-free. When you take that money out in retirement, you pay no federal income tax on those gains. This is the core feature that makes a Roth 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 to withdrawals that meet two conditions: you must be at least 59½ years old, and your account must have been open for at least five tax years. If you withdraw gains before meeting both conditions, the IRS taxes those gains as ordinary income and charges a 10% penalty on top.
Your original contributions—the money you put in—can always come out tax-free and penalty-free, regardless of age or how long the account has been open. The tax-free growth applies only to the earnings.
Key Takeaways
- Investment gains in a Roth IRA are never taxed by the federal government, either while the money sits in the account or when you withdraw it in retirement.
- You must be at least 59½ years old and have held the account for at least five tax years to withdraw gains without paying income tax and the 10% early withdrawal penalty.
- Your contributions always come out tax-free, but withdrawing gains before age 59½ triggers both income tax and a 10% penalty unless an exception applies.
- The five-year rule is tied to when you first opened any Roth IRA, not when you made each individual contribution.
Why Roth gains are treated differently from traditional IRA gains
A traditional IRA lets you deduct your contributions from your taxes in the year you make them, which lowers your taxable income. In exchange, the IRS taxes all the money you withdraw later—both contributions and gains—as ordinary income. A Roth IRA works backward: you contribute money that has already been taxed, so the IRS does not let you deduct it. In return, all future withdrawals, including gains, are tax-free.
This is why the Roth is sometimes called a "pay taxes now, not later" account. You give up the immediate tax deduction to avoid taxes on decades of growth. If your investments double or triple, that entire gain comes out tax-free in retirement.
What counts as a gain in your Roth IRA
A gain is any increase in value beyond what you put in. If you contribute $5,000 and your investments grow to $7,000, the $2,000 increase is a gain. Gains come from several sources: interest earned on savings, dividends paid by stocks or mutual funds, capital gains when you sell an investment for more than you paid, and appreciation in the value of stocks or funds you hold.
Your Roth statement will show your contributions separately from your account balance. The difference between the two is your gains. Some custodians (the banks or brokerages that hold your Roth) make this easy to see; others require you to do the math yourself.
The five-year rule and when it starts
The five-year rule is a calendar rule, not a rule about how long you have held money. It means your account must have been open for at least five complete tax years before you can withdraw gains tax-free. The clock starts on January 1 of the year you open your first Roth IRA—any Roth IRA, whether with a bank, brokerage, or employer.
If you open a Roth on December 31, 2024, the five-year period runs through December 31, 2029. You can withdraw gains tax-free starting January 1, 2030, as long as you are also 59½ by then. If you open a second Roth IRA in 2026, it does not restart the clock—you still use the 2024 opening date.
The only exception is if you inherit a Roth IRA from a spouse. In that case, you can treat it as your own and use your own five-year period. If you inherit from a non-spouse, the five-year rule is more complex and depends on when the original owner opened their account.
What happens if you withdraw gains before age 59½
If you withdraw gains before you turn 59½, the IRS treats those gains as taxable income and charges you a 10% early withdrawal penalty. The tax is based on your tax bracket—if you are in the 22% bracket, you pay 22% tax plus the 10% penalty, for a total of 32% of the gain going to the IRS.
There are a few exceptions where the 10% penalty does not apply, even if you are under 59½. These include withdrawals for a first-time home purchase (up to $10,000 lifetime), may have access to education expenses, medical insurance premiums while unemployed, and withdrawals due to disability or medical hardship. Even with these exceptions, you still owe income tax on the gains unless the five-year rule is also met.
Your contributions always come out penalty-free and tax-free, so if you are unsure whether you have gains or just contributions, you can withdraw contributions first without consequence.
How to track your contributions versus gains
Your Roth custodian sends you a statement at least once a year showing your account balance. Most statements also show your total contributions separately. To find your gains, subtract your total contributions from your current balance. Some custodians label this as "earnings" or "investment income."
If you have made multiple contributions over several years, add them all up. If you have rolled over money from another Roth IRA or converted a traditional IRA to a Roth, those amounts count as contributions too. Keep records of every contribution you make, because you will need them if you ever withdraw before retirement or if the IRS questions your withdrawal.
Roth conversions and how they affect the five-year rule
A Roth conversion happens when you move money from a traditional IRA into a Roth IRA. The money you convert is treated as a contribution for five-year rule purposes, but it is also taxable income in the year you convert. This means you pay tax on the conversion upfront, but the gains on that converted money are then tax-free in retirement.
Each conversion has its own five-year clock. If you convert $10,000 in 2024 and another $10,000 in 2026, the first conversion can be withdrawn penalty-free starting in 2029, and the second starting in 2031. However, the gains on both conversions are tax-free as long as your original Roth account (if you have one) has been open for five years and you are 59½.
Frequently Asked Questions
Can I withdraw my gains tax-free if I am 59½ but my account is only three years old?
No. Both conditions must be met: you must be 59½ and your account must have been open for five tax years. If only one is true, withdrawing gains triggers income tax and the 10% penalty. You can always withdraw your contributions without penalty, regardless of age or account age.
What if I withdraw gains by mistake before I turn 59½?
You owe income tax and the 10% penalty on those gains. You can file Form 5329 with the IRS to request a penalty waiver if you have a may have access to exception (disability, medical hardship, first-time home purchase, etc.), but you will still owe the income tax. Contact a tax professional to understand your specific situation.
Do state taxes apply to Roth IRA gains?
No. Roth IRA withdrawals are exempt from federal income tax, and most states also do not tax them. A few states tax all retirement income regardless of source, so check your state's rules. Your custodian can tell you whether your state taxes Roth withdrawals.
If I convert a traditional IRA to a Roth, are the gains on the converted money taxed?
The conversion itself is taxable in the year you do it, but gains on the converted money after the conversion are tax-free in retirement, as long as your Roth account meets the five-year and age 59½ rules. You pay tax once, at conversion time, and then the money grows tax-free forever.
What if I need to withdraw gains for a first-time home purchase?
You can withdraw up to $10,000 in gains penalty-free for a first-time home purchase, even if you are under 59½. You still owe income tax on those gains unless your account has been open five years. "First-time" means you have not owned a home in the past two years, and the money must be used within 120 days of withdrawal.