You do not pay taxes on investment gains inside a Roth IRA while the money sits there, and you do not pay taxes when you withdraw those gains in retirement — as long as you follow the withdrawal rules.

This is the core difference between a Roth IRA and a traditional IRA. In a traditional IRA, you pay income tax on withdrawals. In a Roth IRA, may have access to withdrawals are tax-free, including all the growth your investments earned over the years. The IRS does not tax the gains while they accumulate, and it does not tax them when you take the money out.

The catch is that "may have access to withdrawal" has a specific meaning. You must be at least 59½ years old, and your account must have been open for at least five tax years. If you withdraw before meeting both conditions, the gains portion of your withdrawal is taxable and may also face a 10 percent early withdrawal penalty.

Key Takeaways

  • Investment gains inside a Roth IRA are never taxed while the account is open, and may have access to withdrawals in retirement are completely tax-free.
  • A may have access to withdrawal requires you to be at least 59½ years old and have held the account for at least five tax years — both conditions must be met.
  • If you withdraw gains before age 59½, those gains are taxable as ordinary income and typically subject to a 10 percent early withdrawal penalty.
  • You can withdraw your contributions (the money you put in) at any time without tax or penalty, even if the account has not been open five years.
  • The five-year rule applies to each Roth IRA account separately, so opening multiple accounts does not reset the clock.

What counts as a gain in your Roth IRA

A gain is any increase in value above what you put in. If you contribute $5,000 and your investments grow to $7,000, the $2,000 of growth is the gain. This includes stock price increases, dividend payments, interest from bonds, and any other earnings your money generates.

The IRS separates your Roth IRA balance into two parts: contributions (your original deposits) and earnings (everything else). This distinction matters because the tax treatment is different. You can pull out your contributions whenever you want without tax or penalty. The earnings are what the five-year rule and age requirement protect.

The five-year rule and how it works

The five-year rule is not about how long you have been saving. It is about when you opened your first Roth IRA. The clock starts on January 1 of the year you made your first contribution to any Roth IRA, and it runs for five consecutive tax years. Once five years have passed, you can withdraw earnings tax-free if you are 59½ or older.

If you open a Roth IRA in 2024, the five-year period runs through 2028. You can withdraw earnings without tax starting January 1, 2029, provided you are also 59½ by then. If you open a second Roth IRA in 2025, it does not restart the clock — your first account's five-year period still ends in 2028.

There are a few exceptions to the five-year rule. If you inherit a Roth IRA from a spouse, the five-year period does not apply to you. If you convert a traditional IRA to a Roth, a separate five-year rule applies to the converted amount. These situations are complex, and the rules differ based on your relationship to the original account holder.

What happens if you withdraw before age 59½

If you take money out of your Roth IRA before you turn 59½, the earnings portion is taxed as ordinary income at your current tax rate. You also owe a 10 percent early withdrawal penalty on those earnings. So if you withdraw $2,000 in gains and you are in the 22 percent tax bracket, you would owe $220 in income tax plus $200 in penalty — a total of $420 on that $2,000.

Your contributions always come out first and tax-free. Only after you have withdrawn all your contributions does the early withdrawal penalty apply to earnings. This means if you contributed $5,000 and your account grew to $7,000, you can withdraw the full $5,000 with no tax or penalty. If you then withdraw another $2,000, that $2,000 is gains and subject to tax and penalty.

There are narrow exceptions to the early withdrawal penalty — for example, if you become permanently disabled or face a may have access to medical hardship — but these do not eliminate the income tax on the gains themselves. The penalty is waived, but you still owe income tax.

How Roth IRAs differ from taxable investment accounts

In a regular taxable brokerage account, you pay capital gains tax every year on profits you sell, and you pay tax on dividends and interest as they arrive. You owe these taxes whether you withdraw the money or not. In a Roth IRA, you pay no tax on any of this while the money is invested, and you pay no tax when you eventually withdraw it — as long as you meet the age and five-year requirements.

This tax-free growth is why Roth IRAs are powerful for long-term investing. The longer your money sits in the account, the more gains accumulate without any tax drag. A $10,000 investment that grows to $50,000 over 30 years generates $40,000 in gains. In a taxable account, you would owe tax on those gains each year. In a Roth, you owe nothing.

How Roth conversions affect the five-year rule

If you convert money from a traditional IRA to a Roth IRA, the five-year rule applies separately to the converted amount. You must wait five years from the conversion before you can withdraw those converted funds without penalty. This is different from the five-year rule that applies to your original Roth contributions.

For example, if you convert a traditional IRA in 2024, you cannot withdraw that converted money penalty-free until 2029, even if you already had a Roth IRA open since 2020. The conversion starts its own five-year clock. The income tax on the conversion itself is due in the year you convert, but the early withdrawal penalty is what the five-year rule delays.

State taxes and Roth IRA withdrawals

Federal tax law does not tax may have access to Roth IRA withdrawals, but state tax law varies. Most states do not tax retirement income, including Roth withdrawals. However, a few states tax all income regardless of source. Check your state's tax rules or speak with a tax professional if you live in a state with an income tax and plan to withdraw from a Roth IRA.

This is one area where your location matters. If you move to a different state after you retire, the state you move to is what determines whether your Roth withdrawals are taxed. The state you lived in when you opened the account does not matter.

Frequently Asked Questions

Can I withdraw my contributions without waiting five years?

Yes. Your contributions can be withdrawn at any time, tax-free and penalty-free, regardless of your age or how long the account has been open. Only the earnings portion is subject to the five-year rule and age requirement.

What if I turn 59½ before my five-year period ends?

You still cannot withdraw earnings tax-free until both conditions are met: you must be 59½ AND the account must have been open five years. Meeting one requirement is not enough. You have to wait for both.

Do I owe taxes on dividends and interest inside my Roth IRA?

No. Dividends, interest, and all other earnings inside a Roth IRA are never taxed while the money stays in the account. You only owe tax if you withdraw the earnings before meeting the age and five-year requirements.

If I have multiple Roth IRAs, do I have separate five-year periods for each?

No. The five-year rule applies to all your Roth IRAs together, based on when you opened your first one. Opening a second or third Roth IRA does not reset the clock or create separate five-year periods.

What if I need money before retirement — can I access my Roth without penalty?

You can always withdraw your contributions penalty-free. For earnings, you would owe income tax and typically a 10 percent penalty unless you may have access to for a narrow exception like permanent disability or a first-time home purchase (up to $10,000 lifetime).