How Roth IRAs Handle Taxes on Withdrawals and Growth

Roth IRAs are tax-free on withdrawals, but only if you follow the rules

A Roth IRA lets you withdraw your contributions and earnings without paying federal income tax, but only after you turn 59½ and have held the account for at least five years. The five-year rule applies to each Roth IRA you own — it starts fresh if you open a new one. If you withdraw before meeting both conditions, you owe income tax on the earnings portion, plus a 10% penalty in most cases.

The tax-free part is the draw: money grows inside the account without annual tax bills, and may have access to withdrawals are completely tax-free. You do not report Roth IRA withdrawals on your tax return if they are may have access to. This is different from a traditional IRA, where withdrawals are taxed as ordinary income.

Key Takeaways

Contributions to a Roth IRA come out tax-free at any age, but earnings are tax-free only after age 59½ and five years of account ownership.
The five-year holding period resets for each new Roth IRA you open, so opening multiple accounts does not shorten the wait.
Withdrawing earnings before 59½ triggers income tax on those earnings plus a 10% early withdrawal penalty, unless an exception applies.
You can withdraw contributions early without penalty or tax, but you lose the growth that money would have earned.
Roth conversions from traditional IRAs have their own five-year rule that may differ from your original Roth IRA five-year clock.

The difference between contributions and earnings

Your contributions — the money you put in yourself — always come out tax-free and penalty-free, no matter your age or how long you have owned the account. This is true even if you withdraw on the day after you fund the account. The IRS tracks contributions separately from growth, so you can pull out what you put in without consequence.

Your earnings — the investment gains, dividends, and interest your money made inside the account — are the part that requires the five-year wait and the 59½ age threshold. If you withdraw earnings before both conditions are met, you owe income tax on those earnings at your ordinary tax rate, plus a 10% early withdrawal penalty. The penalty applies to the earnings amount only, not to your contributions.

Example: You open a Roth IRA at age 40 and contribute $7,000. After five years, it grows to $9,500. You can withdraw the $7,000 contribution anytime without tax or penalty. The $2,500 in earnings stays locked until you turn 59½ and have held the account for five years total. If you withdraw the earnings before then, you owe income tax on $2,500 plus a $250 penalty (10% of $2,500).

How the five-year rule works across multiple accounts

The five-year holding period is tied to your first Roth IRA contribution, not to each account separately. If you open your first Roth IRA in 2024, the five-year clock starts in 2024. If you open a second Roth IRA in 2025, you do not get a fresh five-year clock — the same 2024 start date applies to both accounts.

However, if you convert money from a traditional IRA to a Roth IRA, that conversion has its own separate five-year rule. The five-year period for a conversion starts the year you make the conversion, not when you first opened a Roth IRA. This means you could have a five-year wait on conversion earnings even if your original Roth contributions have already cleared the five-year mark.

Exceptions that let you withdraw earnings early

The IRS allows you to withdraw earnings before 59½ without the 10% penalty in specific situations. You still owe income tax on the earnings, but you avoid the penalty. These exceptions include disability, medical expenses over 7.5% of your adjusted gross income, health insurance premiums while unemployed, and a first-time home purchase (up to $10,000 lifetime).

A Roth IRA death benefit also bypasses the early withdrawal penalty: if you inherit a Roth IRA, you can withdraw earnings without penalty, though you still owe income tax on them. The five-year rule for the original account holder does not apply to beneficiaries — the clock is based on when the original owner first contributed, not when you inherited it.

What happens to earnings if you do not meet the five-year rule

If you withdraw earnings before the five-year mark and before age 59½, the IRS treats the withdrawal as taxable income. You report it on your tax return for that year, and it is taxed at your ordinary income tax rate — the same rate as wages or salary. You also owe the 10% early withdrawal penalty unless an exception applies.

The penalty is calculated on the earnings amount only. If you withdraw $3,000 in earnings early, you pay 10% of $3,000 ($300) as a penalty, plus income tax on the full $3,000. The penalty is separate from the income tax — you owe both.

Tax-free growth while the money is in the account

One of the main advantages of a Roth IRA is that your money grows without triggering annual tax bills. If you own stocks that pay dividends, bonds that pay interest, or funds that distribute capital gains, none of that is taxed each year inside the Roth. You do not file Form 1099 for Roth IRA earnings, and you do not report the growth on your tax return while it sits in the account.

This tax-free compounding means your money grows faster than it would in a taxable brokerage account, where you owe tax on dividends and gains every year. Over decades, this difference becomes substantial. A $10,000 investment that doubles every ten years grows to $40,000 in a taxable account after 20 years (after paying tax on gains along the way), but to $50,000 or more in a Roth (depending on your tax bracket and the timing of gains).

Roth conversions and their own five-year rule

If you convert money from a traditional IRA or 401(k) to a Roth IRA, the conversion itself is a taxable event — you owe income tax on the amount converted that year. But the five-year rule for that converted money is separate from your original Roth IRA five-year clock.

The converted amount is split into contributions (the portion you already paid tax on) and earnings (the portion that was pre-tax growth). The earnings portion has its own five-year waiting period that starts the year of the conversion. If you convert in 2024, you cannot withdraw the earnings from that conversion without penalty until 2029, even if your original Roth IRA contributions cleared the five-year mark years earlier.

Frequently Asked Questions

Can I withdraw my contributions without paying tax or penalty?

Yes. Contributions always come out tax-free and penalty-free at any age. The IRS separates contributions from earnings, so you can pull out what you deposited yourself without consequence. You lose the growth that money would have earned, but there is no tax or penalty on the contribution itself.

What if I need the money before age 59½?

You can withdraw contributions anytime without penalty. If you need earnings, you owe income tax on them plus a 10% penalty unless an exception applies — disability, medical expenses, first-time home purchase (up to $10,000), or health insurance while unemployed. Withdrawing contributions early means you lose years of tax-free growth, so it should be a last resort.

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

No. The five-year clock is based on your first Roth IRA contribution, not on each account. If you open a second Roth IRA later, both accounts use the same five-year start date. However, conversions from traditional IRAs have their own separate five-year rule that starts the year you convert.

Do I have to pay tax on Roth IRA growth while the money is in the account?

No. Growth inside a Roth IRA is not taxed each year. Dividends, interest, and capital gains do not trigger annual tax bills. You only owe tax if you withdraw earnings before meeting the age and five-year requirements, or if you withdraw after meeting them (in which case you owe nothing).

What if I inherit a Roth IRA?

Beneficiaries can withdraw contributions anytime without tax or penalty. Earnings can be withdrawn without the 10% early withdrawal penalty, but you still owe income tax on them. The five-year rule is based on when the original account holder first contributed, not when you inherited the account.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.