When You Pay Taxes on Roth IRA Earnings

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

The core benefit of a Roth IRA is that your earnings grow without being taxed each year, and you pay no federal income tax when you take that money out — but this tax-free treatment only applies to may have access to distributions. A may have access to distribution means you have held the account for at least five tax years and you are withdrawing after age 59½, due to disability, due to death, or for a first-time home purchase (up to $10,000 lifetime). If you withdraw earnings before meeting these conditions, the earnings portion of your withdrawal is taxable income in that year, and you may also owe a 10 percent early withdrawal penalty on top of the income tax.

Your contributions to a Roth IRA come out tax-free at any time, regardless of your age or how long you have held the account. The tax-free treatment applies only to the earnings — the investment gains, dividends, and interest your money has generated inside the account. This distinction matters because it determines which part of your withdrawal gets taxed if you take money out before you meet the may have access to distribution rules.

Key Takeaways

• Roth IRA earnings are never taxed while they sit in the account, and they are not taxed when you withdraw them if you meet the five-year holding period and are age 59½ or older.
• If you withdraw earnings before age 59½ and before holding the account five tax years, those earnings are taxable as ordinary income in the year you withdraw them.
• Your contributions always come out tax-free, so you can withdraw what you put in without triggering taxes or penalties at any age.
• The 10 percent early withdrawal penalty applies to earnings withdrawn before age 59½, unless you may have access to for an exception such as disability or first-time home purchase.

How the five-year rule works

The five-year rule is a calendar requirement, not a measure of how long your money has been in the account. Your five-year holding period starts on January 1 of the tax year in which you made your first contribution to any Roth IRA — not the date you opened the account or the date you deposited the money. If you opened a Roth IRA in October 2024 and contributed $7,000, your five-year period began on January 1, 2024, and you will satisfy the rule on January 1, 2029.

This rule applies to each Roth IRA separately if you have more than one account. If you have a Roth IRA you opened in 2020 and another you opened in 2023, the 2020 account has already satisfied the five-year rule, but the 2023 account will not satisfy it until 2028. When you withdraw earnings, the IRS treats all your Roth IRAs as a single pool for tax purposes, but the five-year rule is tracked per account.

If you convert money from a traditional IRA to a Roth IRA, that conversion starts its own five-year holding period. Conversion earnings follow the same five-year rule as regular contributions, though the rules around penalties are more complex — a conversion that happened fewer than five years ago may trigger a 10 percent penalty on the converted amount itself if you withdraw it, separate from any penalty on earnings.

What happens if you withdraw earnings early

If you withdraw earnings before age 59½ and before your five-year holding period ends, the earnings portion of your withdrawal is added to your taxable income for that year. The tax rate depends on your overall income and filing status — the earnings are taxed as ordinary income at whatever marginal rate applies to you. If you are in the 22 percent tax bracket, earnings withdrawn early are taxed at 22 percent. You also owe a 10 percent early withdrawal penalty on the earnings amount, calculated separately.

The IRS uses a specific ordering rule to determine which part of your withdrawal is contributions and which part is earnings. Contributions always come out first, then conversion amounts, then earnings. If you have $50,000 in your Roth IRA consisting of $30,000 in contributions and $20,000 in earnings, and you withdraw $35,000 before age 59½, the first $30,000 is treated as contributions (tax-free and penalty-free) and the remaining $5,000 is treated as earnings (subject to income tax and the 10 percent penalty).

Exceptions to the early withdrawal penalty

Even if you withdraw earnings before age 59½, you can avoid the 10 percent penalty if you meet one of the IRS exceptions. The most common exceptions are disability, death of the account holder, and first-time home purchase. A first-time home purchase allows you to withdraw up to $10,000 of earnings (lifetime limit) without the penalty, though the earnings are still subject to income tax. You are considered a first-time buyer if you have not owned a home in the past two years.

Other exceptions include withdrawals to pay unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income, withdrawals to pay health insurance premiums while unemployed, and withdrawals for may have access to education expenses. Each exception has specific documentation requirements and limits. The earnings are still taxable income in all these cases — the exception only removes the 10 percent penalty.

If you do not meet any exception and you withdraw earnings early, you report the taxable portion on Form 1040 and Form 8606 (Nondeductible IRAs). The Form 8606 is how you tell the IRS which part of your withdrawal is contributions (not taxed) and which part is earnings (taxed).

Earnings on conversions have their own rules

When you convert a traditional IRA to a Roth IRA, the amount you convert is treated as a contribution for purposes of the five-year rule, but the earnings that accumulate on that converted amount after the conversion are subject to different timing rules. If you convert $50,000 from a traditional IRA to a Roth IRA, that $50,000 can be withdrawn tax-free and penalty-free at any time. Any earnings that accumulate on that $50,000 after the conversion date follow the standard five-year and age 59½ rules.

The five-year holding period for conversion earnings starts on January 1 of the year you made the conversion, not the year you made the original contribution to the traditional IRA. If you converted in 2024, your conversion earnings satisfy the five-year rule on January 1, 2029. This means you could have a situation where you can withdraw your original contributions and your conversion amount tax-free, but you cannot withdraw the earnings on that conversion without tax and penalty until 2029 or age 59½, whichever is later.

How to track your basis for withdrawals

Your basis is the total amount of contributions and conversions you have made to all your Roth IRAs. Tracking this number matters because it determines how much of any withdrawal is tax-free. Keep records of every contribution you make and every conversion you complete, including the year and the amount. The IRS does not track this for you — you are responsible for maintaining documentation.

When you file your tax return in the year you make a withdrawal, you report your basis on Form 8606. This form calculates how much of your withdrawal is contributions (tax-free) and how much is earnings (potentially taxable). If you do not file Form 8606 or if you understate your basis, the IRS may treat more of your withdrawal as earnings than is actually the case, resulting in taxes you do not owe. Keep copies of your contribution records, conversion confirmations, and Form 8606 filings for at least three years after you file the return.

State taxes on Roth IRA earnings

Federal income tax is not the only tax that may apply to Roth IRA earnings withdrawn early. Some states tax retirement account withdrawals, and the rules vary significantly by state. Most states that have an income tax do not tax Roth IRA withdrawals at all, but a few states tax all retirement income regardless of the account type. Pennsylvania, for example, does not tax retirement income, while New Jersey taxes distributions from IRAs in certain circumstances.

If you live in a state with income tax, contact your state tax authority or review your state's tax guide for IRAs to understand whether early Roth IRA withdrawals are subject to state tax. This is separate from federal tax and the federal penalty — you could owe federal income tax and a federal penalty on early earnings withdrawals, state income tax on the same withdrawal, or state tax but no federal penalty if you meet a federal exception.

Frequently Asked Questions

Can I withdraw my earnings tax-free if I am over 59½ but have not held the account five years?

No. You must satisfy both conditions: age 59½ or older AND a five-year holding period. If you are 62 but opened your Roth IRA only three years ago, earnings withdrawals are still taxable and subject to the 10 percent penalty. The five-year rule does not waive at any age.

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

Your contributions come out first under the IRS ordering rule, so you can withdraw them tax-free and penalty-free at any age. The earnings remain in the account and continue to grow tax-free. You only trigger tax and penalties on earnings if you actually withdraw them before meeting the may have access to distribution rules.

Do I owe taxes on Roth IRA earnings if I never withdraw them?

No. Roth IRA earnings are never taxed while they remain in the account, no matter how long you hold the account or how large the earnings grow. Taxes apply only when you withdraw the earnings, and only if you do not meet the may have access to distribution rules.

If I convert a traditional IRA to a Roth, do I pay taxes on the conversion amount?

Yes, you pay income tax on the amount you convert in the year of the conversion. This is separate from the question of whether you can withdraw it later. Once you have paid tax on the conversion, that amount can be withdrawn tax-free. Earnings on the converted amount follow the five-year rule.

What form do I file if I withdraw Roth IRA earnings early?

You file Form 8606 (Nondeductible IRAs) with your Form 1040 tax return. Form 8606 calculates your basis and determines how much of your withdrawal is taxable earnings versus tax-free contributions. You must file this form even if you do not owe tax, to document your basis for the IRS.