You don't pay taxes on Roth IRA withdrawals in retirement—that's the whole point

A Roth IRA is designed so you pay taxes on the money going in, not coming out. This means when you withdraw money in retirement, you owe nothing to the IRS on those withdrawals. The tax bill happens upfront, when you contribute, not later.

The catch is that this tax-free treatment only applies if you follow the rules. If you withdraw money before age 59½, or if your account hasn't been open for at least five years, you may owe taxes and penalties on the earnings portion. Your contributions themselves can always come out tax-free, but the growth on that money is different.

Understanding which money is which—contributions versus earnings—is the key to knowing what you actually owe.

Key Takeaways

  • Contributions to a Roth IRA are made with after-tax dollars, so you pay income tax on that money in the year you earn it, not when you withdraw it.
  • Withdrawals of your contributions come out tax-free and penalty-free at any age, because you already paid tax on them.
  • Earnings (the growth on your money) are tax-free in retirement only if you are at least 59½ and your account has been open for five tax years or more.
  • Early withdrawals of earnings before age 59½ trigger both income tax and a 10 percent penalty, unless you may have access to for a narrow exception.
  • You do not file a tax return to "pay taxes" on a Roth IRA—the tax is already paid when you contribute, and withdrawals are reported on Form 8606.

The difference between contributions and earnings

Your Roth IRA holds two types of money: what you put in (contributions) and what that money earned (growth, or earnings). The IRS treats these completely differently for tax purposes.

Contributions are the dollars you deposited yourself. You paid income tax on this money in the year you earned it—that is why it is called "after-tax" money. Once it is in the Roth, it is yours to withdraw anytime, tax-free and penalty-free. The IRS does not care when you take it out.

Earnings are the investment gains—interest, dividends, capital gains—that your contributions generated inside the account. This is the money that grew tax-free while it sat in the Roth. The IRS wants to tax this part eventually. In retirement (age 59½ or older, with a five-year-old account), you take it out tax-free. Before that, you owe income tax on it plus a 10 percent early withdrawal penalty.

The IRS uses a formula called the pro-rata rule to figure out how much of any withdrawal is contributions versus earnings. If your account is mostly contributions, most of your withdrawal is tax-free. If it is mostly earnings, most of your withdrawal is taxable.

When you pay tax on contributions

You pay tax on Roth contributions in the year you make them, not when you withdraw them. This happens on your regular income tax return.

If you earn $60,000 and contribute $7,000 to a Roth IRA, you report that $60,000 as income on your tax return. You do not get to deduct the $7,000 like you would with a traditional IRA. You pay income tax on the full $60,000. The $7,000 goes into the Roth with taxes already paid.

This is why Roth contributions do not reduce your taxable income in the year you make them. The tax bill is settled upfront. When you withdraw that $7,000 later—whether in five years or thirty years—you owe nothing on it.

Withdrawals before retirement and the five-year rule

You can withdraw your contributions anytime without penalty. But if you withdraw earnings before age 59½, you face both income tax and a 10 percent penalty—unless you meet a narrow exception.

There is also a five-year holding period. Your account must have been open for at least five tax years before you can withdraw earnings tax-free, even at age 59½ or older. This five-year clock starts on January 1 of the year you make your first contribution to any Roth IRA. If you open a Roth in 2024, the five-year period ends on January 1, 2029.

The exceptions to the 10 percent penalty (though not the income tax) include disability, medical expenses over 7.5 percent of your adjusted gross income, health insurance premiums while unemployed, and first-time home purchase (up to $10,000 lifetime). Even with an exception, you still owe income tax on the earnings portion.

Your contributions themselves are never subject to the penalty, only the earnings. The IRS assumes you are taking out contributions first when you withdraw, unless you have other IRAs that complicate the picture.

Reporting Roth withdrawals on your tax return

When you withdraw money from a Roth IRA, the financial institution sends you a Form 1099-R in January of the following year. This form reports the total amount withdrawn. You then file Form 8606 with your tax return to tell the IRS how much of that withdrawal was contributions (tax-free) versus earnings (possibly taxable).

Form 8606 is where you track your Roth basis—the total contributions you have ever made to any Roth IRA. You subtract this from the total withdrawal to find the taxable earnings portion. If you withdrew only contributions, your taxable amount is zero.

You do not need to file Form 8606 if your withdrawal was entirely contributions and you have no other IRAs. But if you have a traditional IRA, SEP-IRA, or SIMPLE IRA, the pro-rata rule kicks in and Form 8606 becomes required.

Conversions and the pro-rata rule

If you convert money from a traditional IRA to a Roth IRA, you pay income tax on the converted amount in that tax year. This is a one-time tax bill, not an ongoing tax on the Roth itself.

The pro-rata rule applies if you have both traditional and Roth IRAs. When you withdraw from a Roth, the IRS treats all your IRAs as one pool for tax purposes. If you have $50,000 in a traditional IRA and $10,000 in a Roth, and you withdraw $10,000 from the Roth, the IRS assumes 83 percent of that withdrawal ($8,300) came from pre-tax money in the traditional IRA. You owe tax on that $8,300 even though you took it from the Roth.

This rule makes it harder to do a "backdoor Roth" conversion if you have existing traditional IRA balances. You cannot simply convert a small amount and avoid tax; the pro-rata rule pulls in all your IRA money.

Income limits and Roth contributions

The IRS limits who can contribute directly to a Roth based on income. If your income exceeds the limit for your filing status, you cannot contribute that year. These limits change annually.

If you contribute more than the limit allows, you have made an excess contribution. You owe a 6 percent penalty tax on the excess amount each year it sits in the account. You can fix this by withdrawing the excess and any earnings on it before your tax return deadline (usually April 15 of the following year). If you do, you avoid the penalty.

This is separate from income tax. The 6 percent penalty applies to the contribution itself, not to income tax on earnings. It is a reason to double-check your income before you contribute.

Frequently Asked Questions

Do I have to pay taxes on Roth IRA growth?

No. The growth inside a Roth IRA is never taxed, as long as you follow the rules when you withdraw. You pay tax on the money going in (contributions), and then all growth is tax-free forever. Withdrawals of earnings in retirement are also tax-free if you are 59½ and your account is five years old.

What happens if I withdraw earnings before age 59½?

You owe income tax on the earnings portion plus a 10 percent penalty. For example, if you withdraw $5,000 and $3,000 is earnings, you pay income tax on that $3,000 at your regular rate, plus $300 in penalty. Contributions come out first and are never penalized. A few exceptions (disability, medical expenses, first-time home purchase) waive the penalty but not the income tax.

Can I withdraw my contributions without paying taxes?

Yes. Contributions are always tax-free and penalty-free to withdraw, at any age. You already paid tax on them when you earned the money. The IRS assumes you withdraw contributions first, so if you take out less than your total contributions, you owe nothing.

Do I need to file Form 8606 every year?

Only in years when you withdraw from a Roth IRA. You file it once per year if you took any distributions that year. If you have other IRAs (traditional, SEP, or SIMPLE), you must file it even if you only withdrew contributions, because the pro-rata rule applies.

What is the five-year rule, and does it apply to contributions?

The five-year rule says your account must be open for five tax years before earnings can come out tax-free. It does not apply to contributions—those are always tax-free. The five-year clock starts January 1 of the year you open the account, not the year you make your first contribution. If you opened a Roth in 2024, the five years end January 1, 2029.