You don't pay federal income tax on Roth IRA earnings when you withdraw them, as long as you follow the rules

The core advantage of a Roth IRA is that your investment earnings grow tax-free and come out tax-free in retirement. Unlike a traditional IRA, where you pay income tax on withdrawals, a Roth IRA lets you take out both your contributions and the money they earned without owing federal income tax — provided you've held the account for at least five tax years and you're at least 59½ years old when you withdraw.

This tax-free treatment applies only to may have access to distributions. If you withdraw earnings before you meet both conditions (the five-year holding period and age 59½), you'll owe income tax on those earnings, plus a 10% penalty in most cases. Your contributions, however, always come out tax-free, regardless of when you withdraw them.

Key Takeaways

  • Roth IRA earnings are never taxed by the federal government if you withdraw them after age 59½ and have held the account for at least five tax years.
  • If you withdraw earnings before meeting both conditions, you pay income tax on the earnings plus a 10% early withdrawal penalty, with limited exceptions.
  • Your contributions to a Roth IRA always come out tax-free, even if you withdraw them early, because you already paid tax on that money when you earned it.
  • State income tax on Roth IRA withdrawals depends on your state; most states don't tax them, but a few do.
  • Roth conversions (moving money from a traditional IRA to a Roth) are taxable in the year you convert, but future earnings on that converted money are tax-free.

The five-year rule and why it matters

The five-year holding period is a calendar rule, not a rule about your age. It starts on January 1 of the tax year in which you first contributed to any Roth IRA, not when you opened the specific account you're withdrawing from. If you opened your first Roth IRA in 2024, the five-year period ends on January 1, 2029, and you can withdraw earnings tax-free starting that date (assuming you're also 59½).

This rule applies even if you've made only one contribution. If you put $1,000 into a Roth IRA in 2024 and it grows to $5,000 by 2029, you can withdraw the full $5,000 tax-free once you turn 59½ and the five years have passed. The IRS counts the five years from the first day of the tax year you opened your first Roth account, not from the date you deposited money.

If you have multiple Roth IRAs, the five-year rule applies to all of them together. You don't restart the clock when you open a second or third account.

What happens if you withdraw earnings early

If you take out earnings before you've satisfied both the five-year rule and the age 59½ requirement, the IRS treats those earnings as taxable income in the year you withdraw them. You'll owe income tax at your ordinary tax rate, which could be 10%, 12%, 22%, or higher depending on your total income that year.

On top of income tax, you'll also owe a 10% early withdrawal penalty on the earnings. If you withdraw $2,000 in earnings before age 59½, you'd owe income tax on that $2,000 plus $200 in penalty. Some exceptions exist — for example, if you're disabled, a beneficiary withdrawing after the account holder's death, or using funds for a first-time home purchase (up to $10,000 lifetime) — but these are narrow and require specific documentation.

Your contributions, by contrast, have no penalty and no tax if withdrawn early. You can always take out the money you put in without consequence.

State income tax on Roth IRA withdrawals

Most states don't tax Roth IRA withdrawals, but a handful do. States that currently tax retirement account withdrawals include Vermont, Minnesota, and a few others, though the rules and rates vary. If you live in one of these states, you may owe state income tax on your Roth IRA earnings even though you owe nothing to the federal government.

Check your state's tax authority website or speak with a tax preparer if you live in a state with an income tax. The federal tax-free treatment doesn't automatically mean your state will follow the same rule.

How Roth conversions affect your tax bill

A Roth conversion is when you move money from a traditional IRA (or a 401(k) in some cases) into a Roth IRA. The year you convert, you owe federal income tax on the amount you move, because you're essentially "cashing out" a pre-tax account and moving it to an after-tax one. If you convert $50,000 from a traditional IRA to a Roth, you'll owe income tax on that $50,000 in the year of conversion.

Once the money is in the Roth, however, all future earnings on it are tax-free, and you won't owe tax when you withdraw it (assuming you meet the five-year rule and age 59½). The conversion itself is a one-time tax event; the benefit comes later.

Tracking contributions versus earnings

The IRS uses a specific order to determine which money you're withdrawing: contributions first, then conversions, then earnings. This matters because contributions and conversions have different tax treatment. If you withdraw $10,000 from a Roth IRA that holds $8,000 in contributions and $5,000 in earnings, the first $8,000 comes out tax-free (contributions), the next $2,000 comes from conversions (which may have tax consequences depending on when you converted), and you haven't touched the earnings.

Keep records of your contributions, conversions, and the year each conversion happened. The IRS Form 8606 is used to track this, and your brokerage should also maintain records. When you withdraw, you can reference these documents to show which portion is taxable.

Required minimum distributions and Roth IRAs

Unlike traditional IRAs, Roth IRAs have no required minimum distributions during your lifetime. You can leave the money in the account as long as you want, and all earnings continue to grow tax-free. This makes Roths a powerful tool for building wealth across decades without being forced to withdraw and pay tax.

Your beneficiaries, however, do face distribution rules after you die. The rules depend on when you pass away and who inherits the account, but generally they must withdraw the balance within a set timeframe. Those withdrawals are tax-free if the account meets the five-year rule, but the timing of distributions is no longer optional.

Frequently Asked Questions

Do I pay taxes on Roth IRA interest and dividends?

No. Interest, dividends, and capital gains inside a Roth IRA are never taxed, whether you withdraw them or leave them to grow. The tax-free growth applies to all types of investment earnings. You only pay tax if you withdraw earnings before age 59½ and haven't held the account for five years.

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

You can withdraw your contributions anytime without tax or penalty. The earnings stay in the account and continue to grow tax-free. This is one reason Roths are flexible — you have access to your own money without triggering tax consequences.

Do I report Roth IRA earnings on my tax return?

If you take a may have access to distribution (after age 59½ and five years), you don't report it as income. If you withdraw earnings early, you report the taxable portion on Form 1040. Your brokerage will send you a Form 1099-R showing the distribution amount, and you'll use that to complete your return.

Can I avoid the early withdrawal penalty on earnings?

Yes, in specific cases. Exceptions include disability, medical expenses exceeding 7.5% of adjusted gross income, health insurance premiums while unemployed, and first-time home purchase (up to $10,000 lifetime). You must document the reason and may need to file Form 5329 with your tax return.

What if I convert a traditional IRA to a Roth — do I pay tax twice?

You pay tax once, in the year of conversion, on the amount you move. After that, the money grows tax-free in the Roth. You don't pay tax again when you withdraw it in retirement. The conversion itself is the taxable event.