You don't pay taxes on money you withdraw from a Roth IRA in retirement, but the rules depend on how long you've held the account and what kind of money you're taking out.

A Roth IRA is designed to let your money grow tax-free. That means the earnings—the investment gains—never get taxed when you withdraw them in retirement, as long as you follow the rules. The contributions you put in (your own money) were never tax-deductible anyway, so you don't pay tax on those either when you take them out.

The catch is timing. The IRS has specific rules about when you can withdraw without penalty, and those rules are different for contributions versus earnings. If you break the rules, you'll owe taxes and possibly a 10% penalty on the earnings portion.

Key Takeaways

  • Contributions you put into a Roth IRA come out tax-free at any time, since you already paid taxes on that money when you earned it.
  • Earnings (investment growth) come out tax-free only if you're 59½ or older and have held the account for at least five tax years.
  • If you withdraw earnings before age 59½ or before the five-year mark, you owe income tax plus a 10% penalty on the earnings portion.
  • The five-year rule applies to your first Roth IRA contribution, not to each deposit separately, so opening an account early matters even if you don't fund it right away.

How contributions and earnings are taxed differently

When you put money into a Roth IRA, you're using money you've already paid income tax on. That's why contributions come out tax-free—the IRS already got its cut when you earned the money. You can withdraw your contributions at any age without owing taxes or penalties, even if you haven't reached retirement yet.

Earnings are different. These are the investment gains—the interest, dividends, and capital gains your money makes while it sits in the account. The IRS wants to tax those earnings eventually. If you follow the rules, you never pay tax on them. If you break the rules, you pay income tax on the earnings you withdraw, plus a 10% early withdrawal penalty.

The IRS doesn't track which dollars in your account are contributions and which are earnings, so there's a formula. When you withdraw money, contributions come out first. Once you've withdrawn all your contributions, any additional withdrawal is treated as earnings.

The five-year rule for earnings

To withdraw earnings tax-free, you must have held your Roth IRA for at least five tax years. This clock starts on January 1 of the year you made your first contribution to any Roth IRA you own. If you opened a Roth IRA on December 15, 2023, and made a contribution that year, your five-year period started January 1, 2023. After December 31, 2027, you've satisfied the five-year rule.

The five-year rule applies to all your Roth IRAs together, not to each account separately. If you have three Roth IRAs and made your first contribution to one of them in 2023, all three accounts satisfy the five-year rule on the same date. Opening multiple accounts doesn't reset the clock.

You can open a Roth IRA and wait without funding it, and the five-year clock still runs. This matters if you plan to convert a traditional IRA to a Roth later—the conversion has its own five-year rule, and starting the clock early can save you money.

Age 59½ and the penalty exception

You also need to be 59½ or older to withdraw earnings without a 10% penalty. If you meet the five-year rule but are younger than 59½, you can still withdraw your contributions penalty-free, but earnings will be taxed and penalized.

There are a few exceptions to the age requirement. You can withdraw earnings without penalty if you're disabled, if you're a first-time homebuyer (up to $10,000 lifetime), if you're paying for may have access to education expenses, or if you're paying for health insurance while unemployed. These exceptions let you access earnings early without the 10% penalty, but you still owe income tax on the earnings themselves.

Death is also an exception. If you inherit a Roth IRA, the beneficiary can withdraw earnings without the 10% penalty, though income tax may apply depending on when the original account holder died and whether the five-year rule was met.

What happens if you withdraw earnings early

If you take out earnings before age 59½ or before the five-year rule is satisfied, the IRS treats it as a taxable distribution. You'll owe income tax on the earnings at your regular tax rate. You'll also owe a 10% penalty on the earnings amount, which gets added to your tax bill.

The penalty is calculated only on the earnings portion, not on your contributions. If you withdraw $5,000 and $3,000 of that is earnings, the 10% penalty applies only to the $3,000. The $2,000 in contributions comes out free and clear.

You report the withdrawal on your tax return using Form 8606. This form tells the IRS how much of your withdrawal was contributions (nontaxable) and how much was earnings (taxable). If you don't file Form 8606, the IRS may assume your entire withdrawal is earnings and tax you on more than you actually owe.

Roth conversions have their own five-year rule

If you convert money from a traditional IRA to a Roth IRA, that conversion has a separate five-year rule. The converted amount must sit in the Roth for five tax years before you can withdraw it without penalty if you're under 59½. This is different from the five-year rule for contributions.

Each conversion year starts its own five-year clock. If you convert $10,000 in 2023 and another $10,000 in 2024, the 2023 conversion can be withdrawn penalty-free after December 31, 2027, but the 2024 conversion can't be withdrawn penalty-free until after December 31, 2028.

Contributions to a Roth IRA (money you deposit directly) don't have this conversion five-year rule. Only converted amounts do. This is why it matters whether you're converting or contributing—the tax rules are stricter for conversions.

Required minimum distributions don't apply during your lifetime

Traditional IRAs require you to start taking money out at age 73 (as of 2023, though this age changes with law). Roth IRAs have no such requirement while you're alive. You can leave your money in the account to grow tax-free for as long as you want, and you never have to withdraw anything.

Your beneficiaries are different. After you die, the person who inherits your Roth IRA must withdraw the money over time, though the rules depend on their relationship to you and when you died. The withdrawals are tax-free if the five-year rule was met, but the beneficiary can't leave the money untouched forever.

Frequently Asked Questions

Can I withdraw my Roth IRA contributions without paying taxes?

Yes. Contributions come out tax-free and penalty-free at any age. The IRS already taxed that money when you earned it, so you don't pay again when you withdraw it. You can take out contributions whenever you need them without affecting your retirement savings.

What's the difference between the five-year rule and the age 59½ rule?

Both must be satisfied to withdraw earnings tax-free. The five-year rule measures how long you've owned a Roth IRA (starting from your first contribution). The age rule requires you to be 59½. If you're 65 but opened your Roth only two years ago, you still can't withdraw earnings without taxes and penalty.

Do I have to report my Roth IRA withdrawals on my tax return?

If you withdraw only contributions, you don't report anything. If you withdraw earnings, you must file Form 8606 to tell the IRS how much is taxable. Even if the withdrawal is tax-free (because you meet both the five-year and age rules), you still file the form to document it.

What happens if I withdraw earnings before the five-year rule is met?

You owe income tax on the earnings at your regular tax rate, plus a 10% penalty. The penalty applies only to the earnings, not to your contributions. For example, if you withdraw $5,000 with $2,000 in earnings, you pay tax and penalty on the $2,000 only.

Can I avoid the penalty if I'm under 59½?

Yes, if you meet one of the exceptions: disability, first-time homebuyer (up to $10,000 lifetime), may have access to education expenses, or health insurance while unemployed. These exceptions waive the 10% penalty but not the income tax on earnings. You still owe tax on the earnings themselves.