Roth IRA gains are not taxed when you withdraw them, as long as you follow the account rules

The money your Roth IRA earns—through interest, dividends, or investment growth—stays tax-free inside the account and comes out tax-free when you withdraw it. You do not pay federal income tax on those gains at withdrawal time, and in most states you do not pay state income tax either. This is the core advantage of a Roth IRA over a traditional IRA, where gains are taxed as ordinary income when you take the money out.

The catch is that this tax-free treatment only applies if you meet two conditions: you must be at least 59½ years old, and your account must have been open for at least five tax years. If you withdraw gains before meeting both conditions, those gains are taxed as ordinary income, and you also owe a 10% early withdrawal penalty on top of the tax. Your original contributions, however, can always come out tax-free and penalty-free, regardless of age or account age.

Key Takeaways

  • Gains in a Roth IRA are never taxed when you withdraw them, as long as you are at least 59½ and your account has been open for five tax years.
  • If you withdraw gains before age 59½ or before the five-year mark, the gains are taxed as ordinary income plus a 10% early withdrawal penalty.
  • Your original contributions to a Roth IRA can be withdrawn at any time, at any age, with no tax or penalty.
  • Earnings that stay inside the account grow tax-free every year, even if you never withdraw them.

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, not the day you fund it. If you opened a Roth IRA in 2024, the five-year period ends on January 1, 2029. After that date, you can withdraw gains tax-free and penalty-free as long as you are 59½ or older.

This rule applies to your Roth IRA account as a whole, not to each contribution separately. If you have multiple Roth IRAs, the five-year clock is based on when you opened your first one. If you convert a traditional IRA to a Roth IRA, a separate five-year rule applies to the converted amount, but only if you withdraw the conversion before age 59½—the original five-year rule for gains does not restart.

The difference between contributions and gains

Your contributions are the dollars you put into the account yourself. Your gains are the earnings—interest, dividends, capital gains from selling investments at a profit. The IRS treats these two parts very differently.

You can withdraw your contributions at any time, at any age, with no tax or penalty. The IRS knows how much you contributed because you report it on Form 8606 when you file your taxes. If you withdraw $5,000 and you contributed $8,000, the first $5,000 comes out as contributions and is not taxed.

Gains, on the other hand, are locked until you are 59½ and the account is five years old. If you try to withdraw gains early, the IRS treats them as taxable income in the year you withdraw them, and adds a 10% penalty on top. The penalty applies only to the gains, not to your contributions.

What happens if you withdraw gains before age 59½

If you withdraw gains before you turn 59½, you owe ordinary income tax on those gains plus a 10% early withdrawal penalty. The tax rate depends on your total income for the year—it could be 10%, 12%, 22%, or higher depending on your tax bracket. The 10% penalty is calculated on the gains only, not on your contributions.

There are a few exceptions to the 10% penalty, though not to the income tax. You can withdraw gains penalty-free (but still taxed) if you are using the money for a first-time home purchase (up to $10,000 lifetime), if you become disabled, if you are a beneficiary withdrawing after the account holder's death, or if you are withdrawing to pay for medical expenses or health insurance while unemployed. In each case, you still owe income tax on the gains, but the 10% penalty does not apply.

State income tax on Roth IRA withdrawals

Most states do not tax Roth IRA withdrawals, including the gains. However, a handful of states tax all retirement income regardless of the account type. Pennsylvania, Tennessee, and a few others tax distributions from IRAs, including Roths. The tax rate and rules vary by state.

If you live in a state that taxes IRA withdrawals, you will owe state income tax on your gains when you withdraw them, even if you are 59½ and the five-year rule is satisfied. You will not owe federal tax, but you will owe state tax. Check your state's tax authority website or speak with a tax preparer if you are unsure whether your state taxes Roth IRA withdrawals.

Gains that stay in the account are never taxed

As long as the money stays inside your Roth IRA, it grows completely tax-free. You do not file any forms, you do not owe any tax, and you do not have to report the earnings to the IRS each year. This is true whether your gains come from interest on a savings account, dividends from stocks, or capital gains from selling an investment at a profit.

This tax-free growth is one reason people use Roth IRAs as a long-term investment tool. If you invest $7,000 at age 25 and do not touch it until age 65, all the growth over 40 years comes out tax-free. In a taxable brokerage account, you would owe tax on dividends and capital gains every year, even if you did not withdraw the money.

Roth conversions and the pro-rata rule

If you convert money from a traditional IRA to a Roth IRA, the conversion itself is a taxable event. You owe income tax on the amount you convert in the year you do the conversion. However, once the money is in the Roth, it grows tax-free from that point forward.

The pro-rata rule affects how much tax you owe on a conversion. If you have both pre-tax and after-tax money in traditional IRAs, the IRS treats a conversion as if you are converting a proportional mix of both. This can increase your tax bill if you have significant pre-tax balances. The rule applies across all your traditional IRAs, SEP IRAs, and SIMPLE IRAs combined, not just the one you are converting from.

Frequently Asked Questions

Can I withdraw my Roth IRA gains if I am over 59½ but the account is less than five years old?

No. You must meet both conditions: age 59½ and a five-year-old account. If you are 60 but your account is only three years old, your gains are still taxed and penalized if you withdraw them. Wait until the five-year mark passes, then you can withdraw gains tax-free.

What if I withdraw only my contributions and leave the gains in the account?

You can do this at any time with no tax or penalty. The IRS assumes you withdraw contributions first. If you contributed $10,000 and your account is now worth $15,000, you can withdraw $10,000 and owe nothing. The $5,000 in gains stays in the account and continues to grow tax-free.

Do I have to report Roth IRA gains to the IRS each year?

No. You do not file any forms or report earnings while the money is in the account. The Roth IRA custodian (your bank or brokerage) keeps track of your contributions and reports them to the IRS. You only report activity when you withdraw money.

If I inherit a Roth IRA, are the gains taxed when I withdraw them?

No. As a beneficiary, you can withdraw the gains tax-free, regardless of your age or how long the account has been open. However, you must follow the account distribution rules—you cannot simply take all the money out at once without consequences. The rules depend on whether you are a spouse or non-spouse beneficiary and when the original account holder died.

What counts as a gain in a Roth IRA?

Any earnings the account generates count as gains: interest from a savings account or money market fund, dividends from stocks or mutual funds, capital gains from selling an investment for more than you paid for it, and any other investment income. Your original contributions do not count as gains, even if you bought them with money you earned.