Roth IRAs are not taxed on withdrawals in retirement, but earnings withdrawn before age 59½ are taxed as income
The tax treatment of a Roth IRA depends on what you withdraw and when. Money you contribute — your own dollars — comes out tax-free at any age. Earnings (the investment gains inside the account) come out tax-free only if you are 59½ or older and have held the account for at least five tax years. If you withdraw earnings before meeting both conditions, the earnings portion is taxed as ordinary income, and you may owe a 10% early withdrawal penalty on top.
The account itself never pays taxes while your money sits inside it. You do not file taxes on the growth each year the way you would with a regular brokerage account. The tax bill arrives only when you take money out — and only on the earnings portion, not your contributions.
Key Takeaways
- Contributions to a Roth IRA withdraw tax-free at any age, because you already paid income tax on that money when you earned it.
- Earnings withdraw tax-free only if you are at least 59½ years old and have owned the Roth IRA for five or more tax years.
- Withdrawing earnings before age 59½ triggers income tax on the earnings plus a 10% early withdrawal penalty, unless you meet a narrow exception.
- The five-year rule is per account owner, not per account — if you own multiple Roth IRAs, the clock starts with your first Roth IRA contribution.
- Conversions from traditional IRAs to Roth IRAs have their own five-year rule that runs separately from your contribution five-year rule.
Why contributions are never taxed on withdrawal
When you put money into a Roth IRA, you contribute after-tax dollars — money you have already paid income tax on. The IRS lets you take that money back out without filing any tax return on it, because taxing it again would be double taxation. This is true whether you withdraw at age 30 or age 80.
The IRS tracks this through Form 8606, which you file when you make a Roth conversion or when you have both traditional and Roth IRAs. If you withdraw contributions, the IRS knows which dollars are yours and which are earnings, and only the earnings portion gets taxed.
The five-year rule for earnings
Earnings can only withdraw tax-free if two things are both true: you must be 59½ or older, and you must have owned a Roth IRA for at least five tax years. The five-year clock starts on January 1 of the year you make your first Roth IRA contribution, not the day you deposit the money. If you open a Roth IRA on December 31 and contribute $7,000, your five-year period began on January 1 of that same year.
The five-year rule applies to you as an account owner, not to each individual account. If you have three Roth IRAs, the clock does not restart when you open the second or third one. Your five years run from your first Roth contribution across all your Roth accounts combined.
If you withdraw earnings before both conditions are met, the earnings are taxed as ordinary income at your regular tax rate. You also owe a 10% early withdrawal penalty on the earnings amount, unless you fall into a narrow exception (disability, death, first-time home purchase up to $10,000 lifetime, or a few others).
Conversions have a separate five-year rule
If you convert money from a traditional IRA to a Roth IRA, that converted amount has its own five-year holding period. You can withdraw your contributions (the amount you converted) tax-free at any time. But the earnings on that converted money are subject to a five-year rule that starts the year of the conversion, separate from your regular contribution five-year rule.
This matters if you convert a large traditional IRA balance to a Roth and then need to withdraw part of it within five years. The IRS will treat withdrawals as coming out in this order: contributions first (tax-free), then conversion amounts (tax-free after five years), then earnings (taxed and penalized if withdrawn early). You will owe tax and penalty only on the earnings portion.
No annual tax filing on account growth
Unlike a taxable brokerage account or a traditional IRA, a Roth IRA generates no taxable income each year while the money is inside. If your Roth holds stocks that pay dividends, or bonds that pay interest, or funds that distribute capital gains, you do not report any of that on your tax return. The account grows tax-deferred, meaning you pay no tax until you withdraw.
This is one of the main advantages of a Roth over a traditional account. A traditional IRA requires you to take required minimum distributions (RMDs) starting at age 73, and those distributions are taxed as income. A Roth IRA has no RMDs during your lifetime, so you can let the money compound for decades without triggering a tax bill.
State taxes on Roth withdrawals
Federal income tax is the main tax on Roth withdrawals, but some states also tax retirement income. Most states do not tax Roth IRA withdrawals, but a few do. Pennsylvania, for example, taxes IRA withdrawals (both traditional and Roth) as income. New Jersey taxes retirement income from IRAs above certain thresholds. Your state tax bill depends on where you live and your state's rules, not on federal rules.
If you live in a state that taxes retirement income, check your state's tax agency website or speak with a tax professional about how Roth withdrawals are treated in your state. Some states have exemptions or phase-outs for retirement income that may reduce or eliminate your state tax bill.
What happens if you withdraw earnings early
If you withdraw earnings before age 59½ or before your five-year holding period ends, the earnings are taxed as ordinary income. On top of that, you owe a 10% penalty on the earnings amount. If you withdraw $5,000 in earnings and you are 45 years old, you pay income tax on the $5,000 plus $500 in penalty.
A few situations waive the 10% penalty but not the income tax. If you are disabled, or the account owner dies and the beneficiary withdraws, or you withdraw up to $10,000 lifetime for a first-time home purchase, the penalty is waived. The earnings are still taxed as income, but you avoid the 10% penalty. Substantially equal periodic payments (SEPP) under IRS Rule 72(t) also waive the penalty if you follow the formula exactly.
Frequently Asked Questions
Can I withdraw my contributions without paying tax or penalty?
Yes. Contributions withdraw tax-free and penalty-free at any age. You can take out every dollar you put in without any tax consequence. The IRS distinguishes between contributions (your money) and earnings (investment gains), and only earnings are subject to tax and penalty rules.
What if I need money before age 59½ but I have held the account five years?
If you have held the Roth for five years but are under 59½, you can withdraw contributions tax-free and penalty-free. Earnings still owe income tax and the 10% penalty unless you meet an exception like disability or first-time home purchase. You must be both 59½ and have the five-year holding period to withdraw earnings penalty-free.
Do I have to report Roth IRA withdrawals on my tax return?
You do not report the contribution portion. If you withdraw earnings, you report them on Form 8606 and include the taxable amount on your 1040. If the withdrawal is entirely contributions, you may not need to file anything, but check your tax situation or speak with a tax professional to be sure.
If I have multiple Roth IRAs, do I count the five years separately for each one?
No. The five-year rule is based on when you first opened any Roth IRA, not on each account individually. If you opened your first Roth in 2020, all your Roth accounts (opened in 2020, 2021, 2022, or later) share that same five-year clock that started in 2020.
Are Roth IRA withdrawals counted as income for Medicare or financial aid?
Roth withdrawals are generally not counted as income for Medicare premium calculations or FAFSA financial aid, because they are a return of your own contributions. However, the earnings portion may be counted depending on the program. Check with Medicare or your school's financial aid office about how they treat Roth withdrawals in your specific situation.