You typically pay no taxes on Roth IRA withdrawals in retirement

A Roth IRA is designed so that you pay income tax on the money before it goes in, then withdraw it tax-free later. This is the opposite of a traditional IRA, where you deduct contributions upfront and pay tax when you withdraw. With a Roth, the tax bill comes at contribution time, not withdrawal time.

The catch is that you must follow two rules to avoid taxes on your earnings. First, your account must be open for at least five tax years. Second, you must be at least 59½ years old, disabled, deceased (for your beneficiary), or using the first-time homebuyer exception (up to $10,000 lifetime). If you break these rules, you owe income tax on the earnings portion of your withdrawal, plus a 10 percent penalty in most cases.

Your contributions themselves—the money you put in—can always come out tax-free and penalty-free, even before age 59½ and even if your account is brand new. The tax risk only applies to the investment gains your money earned inside the account.

Key Takeaways

  • Contributions to a Roth IRA are made with after-tax dollars, so you owe no tax when you withdraw them at any age.
  • Earnings (investment gains) inside a Roth IRA are tax-free only if you are at least 59½, the account has been open five tax years, and you meet one of four conditions: age, disability, death, or first-time homebuyer status.
  • Withdrawing earnings before age 59½ and before the five-year mark triggers income tax on those earnings plus a 10 percent early withdrawal penalty.
  • The five-year rule applies to the account itself, not to each contribution, so opening a Roth early protects all future contributions.

The five-year rule and how it works

The five-year clock starts on January 1 of the tax year you open your first Roth IRA, not the day you fund it. If you open an account on December 31, 2024, the five years begin on January 1, 2024. This means the five-year period ends on January 1, 2029, and you can withdraw earnings tax-free starting that date (assuming you also meet the age or other condition).

The five-year rule applies to your Roth accounts as a group, not to each individual contribution. You do not have to wait five years from each deposit. Once any Roth IRA you own has been open for five tax years, all your Roth accounts are may be able to access for tax-free earnings withdrawals, provided you meet the age or exception requirement.

If you convert a traditional IRA to a Roth (called a Roth conversion), a separate five-year rule applies to the converted amount. The converted funds have their own five-year waiting period before you can withdraw the earnings without penalty, even if your original Roth IRA has been open longer. Your original contributions to that Roth conversion can come out anytime without penalty.

What happens if you withdraw earnings too early

If you take out earnings before age 59½ and before the five-year mark is reached, you owe ordinary income tax on those earnings at your current tax rate. You also owe a 10 percent early withdrawal penalty on the earnings portion only—not on your contributions.

For example: You open a Roth IRA on March 15, 2024, and deposit $7,000. By December 2024, your account has grown to $7,500 (a $500 gain). If you withdraw the full $7,500 on January 15, 2025, you can take out the $7,000 contribution with no tax or penalty. The $500 in earnings is subject to income tax at your rate plus a 10 percent penalty ($50), totaling roughly $150 to $200 depending on your tax bracket.

The IRS assumes you withdraw contributions first, then earnings. So if you withdraw less than your total contributions, no tax or penalty applies at all.

Exceptions that let you avoid the early withdrawal penalty

Even if your account is less than five years old, you can withdraw earnings without the 10 percent penalty (though you still owe income tax) if you meet one of these conditions: you are disabled, you are deceased (your beneficiary is withdrawing), or you are a first-time homebuyer taking out up to $10,000 lifetime.

The disability exception applies if you are unable to engage in substantial gainful activity because of a physical or mental condition expected to last indefinitely or result in death. You must have documentation from a physician or the Social Security Administration.

The first-time homebuyer exception covers the purchase of a primary residence for yourself, a spouse, a parent, a grandparent, or a child. "First-time" means you (or your spouse) have not owned a home in the past two years. The $10,000 limit is a lifetime maximum across all your Roth IRAs combined, not per account or per year.

Roth conversions and the pro-rata rule

If you convert money from a traditional IRA to a Roth IRA, the IRS applies the pro-rata rule, which can create a tax bill you may not expect. The rule says that if you have both pre-tax and after-tax money in any traditional IRAs, SEP IRAs, or straightforward IRAs, a portion of your conversion is treated as taxable income based on the ratio of pre-tax to after-tax funds across all your accounts.

For example: You have a traditional IRA with $90,000 in pre-tax contributions and $10,000 in after-tax contributions (contributions you did not deduct). You convert $10,000 to a Roth. The IRS treats 90 percent of that conversion ($9,000) as taxable income, even though you converted only after-tax money. You owe income tax on $9,000.

The pro-rata rule applies in the year of conversion and can make large conversions expensive. Some people use a strategy called a "backdoor Roth" to work around this, but it requires careful timing and record-keeping. If you have traditional IRAs with pre-tax balances, consult a tax professional before converting.

Inherited Roth IRAs and beneficiary taxes

If you inherit a Roth IRA from someone other than your spouse, you do not owe income tax on withdrawals, but you must follow withdrawal rules based on your relationship to the original owner and when they died.

If the original owner died before taking required minimum distributions (RMDs), you must withdraw the entire account within ten years (as of 2024 rules). If the original owner had already begun RMDs, you must continue taking at least the same amount each year. Withdrawals are tax-free as long as the account was open for five tax years before the original owner's death.

If you inherit a Roth IRA from your spouse, you can treat it as your own, roll it into your own Roth IRA, or keep it in your name as an inherited account. Spousal rollovers give you the most flexibility and reset the five-year clock if needed.

State taxes and Roth IRAs

Most states do not tax Roth IRA withdrawals, but a few states tax all retirement income regardless of source. States like Minnesota, Vermont, and the District of Columbia tax distributions from retirement accounts, including Roths, though some offer partial exemptions for retirees over a certain age.

If you live in a state with retirement income tax, check your state's rules before you retire. Some states exempt Roth withdrawals specifically, while others tax them the same as traditional IRA withdrawals. Moving to a no-income-tax state before retirement can affect your tax planning, so this is worth discussing with a tax professional if you have a large Roth balance.

Frequently Asked Questions

Can I withdraw my contributions anytime without paying taxes?

Yes. Your contributions to a Roth IRA can be withdrawn at any time, at any age, with no income tax or penalty. The IRS treats contributions as your own money since you already paid tax on it. Only the earnings inside the account are subject to tax and penalty rules.

What if I need money before age 59½ but my account is five years old?

You can withdraw earnings tax-free if the account is five years old and you meet one of four conditions: you are at least 59½, you are disabled, you are a first-time homebuyer (up to $10,000), or you are deceased (beneficiary withdrawing). If none explore, you owe income tax and a 10 percent penalty on the earnings.

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

No. Earnings inside a Roth IRA grow tax-free and are never taxed as long as they stay in the account. You only owe tax if you withdraw the earnings before meeting the age and five-year requirements. If you leave the money untouched, no tax bill ever comes due.

Does a Roth conversion count as income on my taxes?

Yes. The amount you convert from a traditional IRA to a Roth is treated as ordinary income in the year of conversion. You owe income tax on the full converted amount (minus any after-tax contributions), even though you do not receive the money in cash. This can push you into a higher tax bracket.

What if I made a mistake and withdrew earnings too early?

You owe income tax on the earnings and a 10 percent penalty, unless you may have access to for an exception. You can file Form 5329 with your tax return to claim an exception if you meet the disability, death, or first-time homebuyer rules. If you do not may have access to for an exception, you must report the withdrawal and pay the tax and penalty.