You don't pay taxes on withdrawals from a Roth IRA in retirement, but you do pay taxes on the money before you put it in

A Roth IRA is taxed backwards from a traditional IRA. You contribute money that has already been taxed as income. In return, the money grows tax-free inside the account, and you withdraw it tax-free in retirement. The trade-off is that you get no tax deduction in the year you contribute.

This means your tax bill depends on which part of the Roth you're looking at: the contribution (already taxed), the growth (never taxed), or the withdrawal (never taxed). Most people misunderstand which one matters.

Key Takeaways

  • Contributions to a Roth IRA come from after-tax money, so you've already paid income tax on that amount.
  • Investment earnings inside the Roth grow tax-free and are never taxed when you withdraw them in retirement.
  • Withdrawals of your contributions are always tax-free at any age, but earnings withdrawn before age 59½ are taxed as income plus a 10% penalty unless an exception applies.
  • If you have both traditional and Roth IRAs, the IRS treats them as one account for the "pro-rata rule," which can create unexpected taxes on Roth conversions.
  • You never file a tax form for a Roth withdrawal itself, but you do report the contribution on your tax return the year you make it.

Why you don't pay taxes on Roth withdrawals in retirement

Once you reach age 59½ and have held the Roth for at least five tax years, you can withdraw both your contributions and all the earnings without owing federal income tax. This is the core benefit of the Roth structure. A traditional IRA taxes you on the entire withdrawal. A Roth taxes you on nothing.

The five-year rule is per account, not per person. If you open a Roth IRA at age 58, you cannot withdraw earnings tax-free until age 63, even if you have other Roths that are older. The clock starts over if you open a new Roth.

Contributions versus earnings: which one matters for taxes

Your Roth IRA contains two layers: the money you put in (contributions) and the profit it made (earnings). The IRS treats them differently for tax purposes.

Contributions are always yours to withdraw tax-free, at any age, for any reason. You already paid income tax on this money before it went into the account. If you contributed $6,500 and the account grew to $8,000, you can pull out the $6,500 anytime without tax or penalty.

Earnings are the $1,500 of growth. If you withdraw earnings before age 59½ and before the five-year holding period ends, you owe income tax on that $1,500 plus a 10% early withdrawal penalty. After age 59½ and five years, the earnings come out tax-free.

Early withdrawals and the exceptions that avoid the 10% penalty

If you withdraw earnings before age 59½, the IRS charges a 10% penalty on top of income tax. However, several exceptions let you avoid the penalty (though not the income tax on earnings).

The main exceptions are: 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). You can also withdraw earnings penalty-free to pay for education expenses, though income tax still applies. Contributions themselves have no penalty at any age.

If none of these exceptions fit your situation, withdrawing earnings early costs you both income tax and the 10% penalty, which can add up to 30% or more depending on your tax bracket.

The pro-rata rule: why having a traditional IRA complicates Roth conversions

If you own both a traditional IRA and a Roth IRA, the IRS treats them as a single account for tax purposes when you convert money from traditional to Roth. This is called the pro-rata rule.

Here's how it works: suppose you have a traditional IRA with $10,000 in pre-tax contributions and $5,000 in after-tax contributions (contributions you already paid tax on). You want to convert $5,000 of the after-tax money to a Roth. The IRS says you're converting 67% pre-tax and 33% after-tax, so $3,333 of the conversion is taxable. You owe income tax on that $3,333 even though you only wanted to move the after-tax portion.

This rule catches many people by surprise. If you plan to do a Roth conversion, check whether you have any traditional IRAs, SEP IRAs, or SIMPLE IRAs. If you do, you may need to roll them into a 401(k) first to avoid the pro-rata rule.

What you report on your tax return

You don't file a form for a Roth withdrawal itself. The brokerage that holds your Roth doesn't report it to the IRS because withdrawals are not taxable income.

You do report the contribution on Form 8606 (Nondeductible IRAs) in the year you make it, even though the contribution itself is not deductible. This form tells the IRS how much of your Roth basis (contributions) is after-tax money, which matters if you ever need to prove that a withdrawal was a contribution, not earnings.

If you do a Roth conversion, you report it on Form 8606 as well. The form calculates how much of the conversion is taxable under the pro-rata rule.

State taxes and Roth IRAs

Most states do not tax Roth IRA withdrawals. However, a handful of states tax all retirement income regardless of source. Pennsylvania, Illinois, and Mississippi do not tax retirement income at all. New York, New Jersey, and a few others exempt IRAs but may tax other retirement accounts.

If you live in a state that taxes retirement income, check your state's rules on IRAs specifically. Some states follow federal law (no tax on Roth withdrawals), while others have their own rules. This is rare enough that it won't affect most readers, but it's worth confirming if you live in a high-tax state.

Frequently Asked Questions

Can I withdraw my Roth contributions without paying taxes or penalties?

Yes. Contributions are always tax-free and penalty-free at any age. Only earnings are subject to tax and the 10% penalty if withdrawn before age 59½. If you contributed $5,000 and the account is now worth $7,000, you can withdraw the $5,000 anytime.

What happens if I withdraw earnings before age 59½?

You owe income tax on the earnings at your ordinary tax rate, plus a 10% early withdrawal penalty. If you're in the 24% tax bracket and withdraw $1,000 in earnings, you owe roughly $340 in taxes and penalties combined. Some exceptions (disability, first-time home purchase, education) waive the penalty but not the income tax.

Do I have to report my Roth IRA on my tax return?

You report the contribution on Form 8606 in the year you make it. Withdrawals themselves don't need to be reported because they're not taxable income. If you do a Roth conversion, you report that on Form 8606 as well.

What is the five-year rule, and does it apply to all Roth IRAs?

The five-year rule means you must hold a Roth for at least five tax years before you can withdraw earnings tax-free. The clock starts the first year you contribute to any Roth. If you have multiple Roths, the oldest one's five-year period applies to all of them.

If I have a traditional IRA, does it affect my Roth taxes?

Yes, if you convert money from a traditional IRA to a Roth. The pro-rata rule treats all your IRAs as one account, so a portion of the conversion becomes taxable even if you only convert after-tax money. Rolling a traditional IRA into a 401(k) before the conversion can avoid this.