Roth IRA earnings are tax-free when you withdraw them, but only if you follow the rules

The interest, dividends, and capital gains your money earns inside a Roth IRA are not taxed while they sit in the account. You do not pay federal income tax on those earnings when you take them out, either — as long as you have held the account for at least five tax years and you are at least 59½ years old, or you meet one of a few other exceptions (disability, death of the account holder, or first-time home purchase up to $10,000 lifetime).

The catch is that you can only withdraw earnings tax-free if you meet both conditions: the five-year rule and one of the age or circumstance exceptions. If you withdraw earnings before you turn 59½ and before five years have passed, you owe income tax on those earnings plus a 10 percent early withdrawal penalty. Your contributions themselves come out tax-free and penalty-free at any time, regardless of your age or how long the account has been open.

Key Takeaways

  • Interest, dividends, and capital gains earned inside a Roth IRA are never taxed while the money is in the account.
  • You can withdraw earnings tax-free and penalty-free only if the account has been open for at least five tax years and you are age 59½ or older, disabled, deceased, or withdrawing up to $10,000 for a first-time home purchase.
  • Withdrawing earnings before you meet both the five-year and age/circumstance requirements triggers income tax on the earnings plus a 10 percent early withdrawal penalty.
  • Your original contributions always come out tax-free and penalty-free, no matter when you withdraw them or how long you have owned the account.

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 open a Roth IRA in December 2024 and fund it in January 2025, the five-year period still begins January 1, 2024. This means you could be may be able to access to withdraw earnings tax-free as early as January 1, 2029.

The five-year rule applies to each person, not to each account. If you have multiple Roth IRAs, you only need to satisfy the five-year requirement once. However, if you convert a traditional IRA to a Roth IRA, a separate five-year rule applies to the converted amount — the clock restarts for that conversion, even if you already have an older Roth IRA.

Contributions versus earnings: which can you withdraw when

Your contributions (the money you put in from your own pocket) can always come out tax-free and penalty-free. The IRS treats contributions as your own money, already taxed. You can withdraw them at any age, for any reason, without triggering tax or the 10 percent penalty.

Earnings (interest, dividends, capital gains) are the money your contributions made. These are subject to the five-year rule and the age/circumstance requirement. If you do not meet both, you owe income tax on the earnings at your ordinary tax rate, plus the 10 percent early withdrawal penalty.

The IRS uses a specific order when you withdraw money from a Roth IRA: contributions come out first, then conversions (if any), then earnings last. This ordering rule means you can often withdraw a meaningful amount before you touch earnings at all.

Exceptions to the early withdrawal penalty

Even if you have not reached 59½, you can withdraw earnings without the 10 percent penalty if you are disabled (as defined by the IRS), the account owner has died (beneficiaries can withdraw), or you are a first-time homebuyer withdrawing up to $10,000 lifetime. You still owe income tax on the earnings in these cases unless the five-year rule has been satisfied.

There is also an exception for substantially equal periodic payments (SEPP), a strategy where you withdraw a fixed amount each year based on your life expectancy. This avoids the 10 percent penalty but does not avoid income tax on earnings. SEPP is complex and requires IRS Form 72(t); consult a tax professional before using it.

What happens if you withdraw earnings early

If you withdraw earnings before you turn 59½ and before five years have passed, you owe income tax on those earnings at your marginal tax rate (the same rate that applies to your other income that year). You also owe a 10 percent penalty on the earnings amount. For example, if you withdraw $5,000 in earnings and you are in the 22 percent tax bracket, you owe $1,100 in tax plus $500 in penalty, for a total of $1,600.

The IRS will not automatically withhold tax on the withdrawal. You may owe the tax when you file your return, or you may need to make an estimated tax payment to avoid an underpayment penalty. Report the withdrawal on Form 8606 when you file.

Roth conversions and the five-year rule

If you convert money from a traditional IRA or 401(k) to a Roth IRA, that converted amount is subject to its own five-year rule. The converted funds themselves (not the earnings on them) can be withdrawn penalty-free after five years, even before age 59½. However, the earnings on the converted amount still require you to be 59½ or meet another exception.

Each conversion starts a new five-year clock. If you convert in 2024, 2025, and 2026, you have three separate five-year periods to track. This matters if you plan to withdraw converted amounts before retirement.

How to track contributions and earnings

Your Roth IRA custodian (the bank, brokerage, or investment firm holding the account) should provide a year-end statement showing contributions, conversions, and the account balance. Keep these statements. When you withdraw money, you will need to know how much you contributed versus how much is earnings.

If you have lost track, you can reconstruct your contribution history using your tax returns. Form 8606 (Nondeductible IRAs) is filed when you contribute to a Roth IRA and when you convert; copies of past returns show your contribution history. If you cannot find records, contact your custodian — they may have archived statements or can help you reconstruct the balance.

Frequently Asked Questions

Do I owe taxes on Roth IRA interest while the money is in the account?

No. Interest, dividends, and capital gains earned inside a Roth IRA are never taxed while they remain in the account. You only owe tax on earnings if you withdraw them before you meet the five-year rule and age/circumstance requirement.

Can I withdraw my contributions without penalty?

Yes. Your contributions can be withdrawn at any time, at any age, for any reason, without tax or penalty. Only earnings are subject to the five-year rule and the 10 percent early withdrawal penalty.

What if I convert a traditional IRA to a Roth — does the five-year rule apply?

Yes, but only to the earnings on the converted amount. The converted funds themselves can be withdrawn penalty-free after five years. The earnings on the conversion are subject to both the five-year rule and the age/circumstance requirement, just like earnings on regular contributions.

How do I know if I have met the five-year rule?

The five-year period starts on January 1 of the tax year you open your first Roth IRA, not the day you fund it. If you opened your first Roth IRA in 2024, you satisfy the five-year rule on January 1, 2029. You only need to satisfy it once; multiple Roth IRAs do not restart the clock.

What if I withdraw earnings before age 59½ but after five years?

You can withdraw earnings tax-free and penalty-free. Both the five-year rule and the age/circumstance requirement must be met. If only one is met, you owe income tax on the earnings and the 10 percent penalty.