Roth IRA contributions and earnings are taxed differently

Money you put into a Roth IRA is never taxed when you take it out — you already paid income tax on it before it went in. The earnings your money makes inside the account (interest, dividends, capital gains) are also tax-free when you withdraw them, but only if you follow the rules. The main rule is that your account must be open for at least five years and you must be at least 59½ years old when you withdraw the earnings. If you break those rules, the earnings portion of your withdrawal gets taxed as ordinary income, and you may owe a 10 percent penalty on top.

This is the opposite of a traditional IRA, where you get a tax deduction when you contribute but pay income tax on everything you withdraw. With a Roth, you pay the tax upfront and then never again — which is why the account is valuable if you expect to be in a higher tax bracket later.

Key Takeaways

  • Contributions to a Roth IRA come out tax-free at any age, because you paid income tax on the money before depositing it.
  • Earnings inside the account are also tax-free when withdrawn, but only if the account is at least five years old and you are at least 59½ years old.
  • Withdrawing earnings before age 59½ or within five years of opening the account triggers income tax on the earnings plus a 10 percent penalty in most cases.
  • You do not owe taxes on a Roth IRA during the years you own it — taxes are only due when you withdraw money.
  • Roth conversions (moving money from a traditional IRA to a Roth) are taxable in the year you convert, based on the amount you move.

When you can withdraw contributions without tax or penalty

Your contributions — the money you personally deposited — can come out at any time, at any age, with no tax and no penalty. The IRS knows how much you contributed because you report it on Form 5498 each year. If you withdraw $5,000 and you contributed $5,000, you owe nothing.

This is one reason people use Roth IRAs as emergency savings: the contributions are always accessible. However, once you start pulling out earnings (the growth on your money), the five-year and age rules kick in.

The five-year rule for earnings

Your Roth IRA must be open for at least five years before you can withdraw earnings tax-free. The clock starts on January 1 of the year you made your first contribution to any Roth IRA you own. If you opened your account on December 15, 2023, the five-year period ends on January 1, 2029.

The five-year rule applies separately to each Roth conversion you make. If you convert money from a traditional IRA to a Roth in 2024, that converted money has its own five-year period. This matters because if you withdraw the converted amount before five years pass, you owe tax and penalty on the earnings portion of that conversion, even if your original Roth account is older.

If you withdraw earnings before the five-year period ends, the earnings are taxed as ordinary income at your regular tax rate. You also owe a 10 percent penalty on the earnings portion unless an exception applies (such as disability, death, or a first-time home purchase up to $10,000).

The age 59½ rule for earnings

Even if your account is five years old, you must be at least 59½ years old to withdraw earnings without tax. If you are 50 and your Roth has been open for six years, you can still withdraw your contributions, but the earnings are taxable and subject to the 10 percent penalty.

Once you reach 59½ and your account is five years old, both conditions are met and you can withdraw everything — contributions and earnings — tax-free. There is no required withdrawal age for Roth IRAs, so you can leave the money untouched as long as you want.

Exceptions to the penalty on early earnings withdrawals

The 10 percent penalty does not explore in a few situations, even if you withdraw earnings before age 59½ or within five years. These include disability, death (your beneficiary can withdraw), a first-time home purchase (up to $10,000 lifetime), and may have access to education expenses. However, the earnings are still taxed as ordinary income in these cases — you just avoid the penalty.

A first-time home buyer is defined as someone who has not owned a home in the past two years. The $10,000 limit is a lifetime cap across all your IRAs combined, not per year. If you use $8,000 for a home purchase, you have $2,000 left to use for another home purchase later.

How Roth conversions are taxed

When you move money from a traditional IRA to a Roth IRA, you owe income tax on the amount you convert in that tax year. If you convert $20,000 and your tax bracket is 22 percent, you owe roughly $4,400 in federal income tax (plus any state tax). The converted amount itself goes into the Roth tax-free, but the tax bill is separate and due when you file your return.

You do not owe the 10 percent early withdrawal penalty on a conversion, even if you are under 59½. However, if you withdraw the converted money within five years, the earnings portion is subject to the penalty. The contributions portion of the conversion can come out anytime without penalty.

Roth IRAs do not trigger taxes while you own them

Unlike a traditional IRA or taxable brokerage account, a Roth IRA does not generate a tax bill each year. Your investments can grow, split, pay dividends, or gain value without creating any tax liability. You only owe taxes when you actually withdraw money, and then only if you withdraw earnings before meeting the age and time requirements.

This tax-free growth is the main advantage of a Roth over a traditional IRA. If you invest $7,000 and it grows to $50,000 over 30 years, that $43,000 gain is never taxed as long as you follow the withdrawal rules.

Frequently Asked Questions

Do I owe taxes on my Roth IRA every year?

No. A Roth IRA does not generate any annual tax bill. You only owe taxes when you withdraw money, and only on the earnings portion if you withdraw before age 59½ or within five years of opening the account.

Can I withdraw my contributions without paying taxes?

Yes. Contributions always come out tax-free and penalty-free at any age. The IRS tracks how much you contributed each year, so you can withdraw that amount without owing anything.

What happens if I withdraw earnings before age 59½?

The earnings are taxed as ordinary income at your regular tax rate, and you owe a 10 percent penalty on the earnings portion. Some exceptions exist (disability, death, first-time home purchase, education expenses), which waive the penalty but not the income tax.

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

No. The five-year clock starts with your first Roth contribution ever, not with each new account. If you opened a Roth in 2020 and open another in 2024, both accounts use the same five-year start date. However, conversions have their own separate five-year periods.

Do I have to pay taxes on a Roth conversion?

Yes, in the year you convert. You owe income tax on the full amount you move from a traditional IRA to a Roth, based on your tax bracket. The converted money itself goes into the Roth tax-free, but the tax bill is due when you file your return.