You do not pay taxes on earnings while the money sits in a Roth IRA, and you do not pay taxes when you withdraw those earnings in retirement — but only if you follow the account rules.

The core advantage of a Roth IRA is that your money grows tax-free. You contribute after-tax dollars (meaning you already paid income tax on that money), and then the interest, dividends, and capital gains inside the account accumulate without triggering any tax bill each year. When you withdraw in retirement, those earnings come out tax-free as long as you meet two conditions: your account has been open for at least five tax years, and you are at least 59½ years old.

The catch is that these rules apply only to withdrawals you take after retirement. If you withdraw earnings before you turn 59½, you will owe income tax on those earnings plus a 10 percent early withdrawal penalty — even though the money has been sitting in the account untouched. Your contributions (the money you put in) can always come out tax-free and penalty-free, but earnings are locked until retirement.

Key Takeaways

  • Earnings inside a Roth IRA are never taxed each year, no matter how much they grow.
  • You pay no tax on earnings when you withdraw them after age 59½, provided your account has been open for at least five tax years.
  • Withdrawing earnings before age 59½ triggers income tax on those earnings plus a 10 percent penalty, even if you have no other income.
  • Your own contributions can always be withdrawn tax-free and penalty-free at any age.
  • The five-year rule is tied to when you opened your first Roth IRA, not when you made each individual contribution.

How the five-year rule works

The five-year clock starts on January 1 of the tax year in which you open your first Roth IRA. If you opened an account in 2024, the five-year period ends on January 1, 2029. This rule applies to all Roth IRAs you own — if you have multiple accounts, they all share the same five-year start date.

The five-year rule is separate from your age. You could have a Roth IRA open for five years at age 45 and still owe tax and penalty on earnings if you withdraw them, because you are not yet 59½. Both conditions must be met for earnings to come out tax-free.

One exception exists: if you inherit a Roth IRA from a spouse, you can treat it as your own and the five-year clock does not restart. If you inherit from a non-spouse, the five-year rule is more complex and depends on when the original account owner opened their account.

What happens if you withdraw earnings early

Suppose you opened a Roth IRA in 2024, contributed $7,000, and it grew to $9,000 by 2025. If you withdraw $9,000 at age 45, you can take out your $7,000 contribution with no tax or penalty. The $2,000 in earnings is subject to income tax at your ordinary tax rate, plus a 10 percent penalty ($200). You would owe roughly $600 to $800 in taxes and penalty combined, depending on your tax bracket.

The IRS treats contributions and earnings separately. When you withdraw from a Roth IRA, contributions come out first. Only after all contributions are exhausted do withdrawals count as earnings. This means if you have $50,000 in contributions and $10,000 in earnings, you can withdraw up to $50,000 penalty-free at any age.

Exceptions to the early withdrawal penalty

The 10 percent penalty does not apply in a few situations, though income tax on the earnings still does. You can withdraw earnings penalty-free (but not tax-free) if you are a first-time homebuyer withdrawing up to $10,000 lifetime, if you have a may have access to disability, if you are a beneficiary of a deceased account holder, or if you withdraw to pay for unreimbursed medical expenses or health insurance while unemployed.

These exceptions are narrow. "First-time homebuyer" means you have not owned a home in the past two years, and the $10,000 limit is a lifetime cap across all your IRAs. If you use $6,000 now, you can only use $4,000 more in your entire life. The disability exception requires documentation from the Social Security Administration or a physician's statement.

Conversions and the pro-rata rule

If you convert money from a traditional IRA to a Roth IRA, the five-year rule applies separately to that conversion. Money converted in 2024 must stay in the account until 2029 before you can withdraw the converted amount without penalty. However, you can always withdraw your original contributions (not the converted amount) at any time.

The pro-rata rule complicates conversions if you have both traditional and Roth IRAs. When you convert, the IRS treats all your traditional IRAs as one pool for tax purposes. If you have $80,000 in a traditional IRA and $20,000 in pre-tax contributions, converting $20,000 means 80 percent of that conversion is taxable. This rule can create unexpected tax bills and is worth discussing with a tax professional before you convert.

State taxes on Roth IRA earnings

Federal tax law does not tax Roth IRA earnings in retirement, but a few states have their own rules. Most states follow federal law and do not tax retirement account earnings. However, Pennsylvania taxes IRA distributions (both traditional and Roth), and a handful of other states have specific rules for certain types of retirement income.

If you live in or plan to move to a state with an income tax, check that state's treatment of Roth IRAs before you withdraw. Your brokerage or the state revenue department can tell you whether your state taxes Roth distributions.

Reporting Roth IRA activity to the IRS

You do not file a tax return for the Roth IRA itself. Your brokerage sends you a Form 5498-SA each year showing contributions and conversions. When you withdraw, your brokerage sends you a Form 1099-R showing the gross amount withdrawn and how much is a return of contributions versus earnings.

You report this on your tax return only if you withdrew earnings before age 59½ or if you converted from a traditional IRA. If you are simply withdrawing contributions or taking a may have access to distribution in retirement, you may not owe any tax, but you still need to report the withdrawal on your return to show the IRS that it was may have access to.

Frequently Asked Questions

Can I withdraw my contributions anytime without penalty?

Yes. Your contributions (the money you put in) can be withdrawn at any age, any time, with no tax or penalty. Only earnings are restricted. Your brokerage can tell you how much of your balance is contributions versus earnings.

What if I need the money before retirement but do not meet an exception?

You can withdraw, but you will owe income tax on the earnings portion plus a 10 percent penalty. The penalty is calculated only on earnings, not on your contributions. It may still be worth it if you have a genuine need, but it defeats the tax-free growth purpose of the account.

Does the five-year rule reset if I open a second Roth IRA?

No. The five-year clock is based on when you opened your first Roth IRA, not your most recent one. All Roth IRAs you own share the same five-year start date for withdrawal purposes.

Do I have to pay taxes on Roth IRA earnings if I never withdraw them?

No. As long as the money stays in the account, you owe no tax on earnings, no matter how large they grow. Tax is only due when you withdraw.

What if I convert a traditional IRA to a Roth — do I pay tax on the conversion?

Yes, you pay income tax on the amount converted in the year of conversion. The converted amount then sits in the Roth IRA and grows tax-free. You cannot withdraw the converted amount for five years without penalty, but you can always withdraw your original contributions.