When Roth IRA Earnings Come Out Tax-Free and When They Don't

Roth IRA earnings withdraw tax-free only if your account is five years old and you meet an age or circumstance requirement

The earnings in your Roth IRA—the investment gains, dividends, and interest your money has made—are not taxed when you withdraw them, but only if you meet two conditions. First, your account must be at least five years old (measured from January 1 of the year you made your first contribution). Second, you must be at least 59½ years old, disabled, deceased, or using the withdrawal for a first-time home purchase (up to $10,000 lifetime). If both conditions are met, the earnings come out completely tax-free. If you break either rule, the earnings portion of your withdrawal is taxed as ordinary income, and you may owe a 10% early withdrawal penalty on top.

Your contributions to a Roth IRA always come out tax-free and penalty-free, regardless of your age or how long you have owned the account. This is because you already paid income tax on the money before you put it in. Only earnings and converted amounts are subject to the five-year rule and age restrictions.

Key Takeaways

• Roth IRA earnings withdraw tax-free only after the account has existed for five tax years and you meet an age or circumstance requirement (59½, disability, death, or first-time home purchase).
• Your contributions to a Roth IRA always come out tax-free and penalty-free, regardless of your age or how long you have owned the account.
• If you withdraw earnings before meeting both conditions, those earnings are taxed as ordinary income plus a 10% early withdrawal penalty in most cases.
• The five-year rule applies to each Roth IRA separately if you own multiple accounts, though the IRS treats all your Roth IRAs as one account for withdrawal ordering purposes.
• Conversions have their own separate five-year rule that applies to the converted amount, not to your entire account.

The five-year rule and why it matters

The five-year clock starts on January 1 of the tax year in which you make your first Roth IRA contribution—not the date you actually deposit the money. If you open a Roth IRA on December 15, 2024, and contribute $7,000, your five-year period begins January 1, 2024. This means your account will satisfy the five-year requirement on January 1, 2029, even though you only owned it for about four years and two weeks.

This rule applies to each Roth IRA separately in one important way: if you own multiple Roth IRAs, each one has its own five-year clock. However, the IRS treats all your Roth IRAs as a single account when you withdraw money. This means if you have a ten-year-old Roth IRA and a brand-new one, and you take a withdrawal, the IRS assumes you are withdrawing from the oldest account first for tax purposes. The oldest account's five-year requirement is already met, so the withdrawal is treated more favorably than if you had only the new account.

The five-year rule does not reset if you convert a traditional IRA to a Roth IRA. Conversions have their own five-year rule, which is separate and applies only to the converted amount. This is one of the most confusing parts of Roth IRA taxation, and it trips up many people who do conversions. A conversion does not restart the clock on your original Roth IRA contributions.

How the IRS orders your withdrawals

When you take money out of a Roth IRA, the IRS assumes you withdraw in this order: contributions first, then conversions, then earnings. This ordering rule matters because contributions always come out tax-free and penalty-free, while conversions and earnings may not. You cannot choose which part of your account to withdraw—the ordering is automatic and applies to all your Roth IRAs combined, even if you only withdraw from one account.

Suppose you have a Roth IRA with $50,000 in contributions, $20,000 in conversion amounts, and $30,000 in earnings (total $100,000). You withdraw $60,000. The IRS treats this as $50,000 in contributions (tax-free, penalty-free) plus $10,000 of the conversion amount. Whether that $10,000 conversion portion is taxed depends on whether it came from pre-tax or after-tax money in the original traditional IRA, and whether you have met the five-year rule for that conversion.

This ordering rule protects you in one way: you can always access your contributions without tax or penalty, even if your account is brand new. But it also means you cannot strategically withdraw only earnings to avoid the five-year rule. The IRS will not let you do that.

Withdrawals before 59½ and the exceptions

If you withdraw earnings before age 59½ and your account is at least five years old, you owe income tax on the earnings and a 10% early withdrawal penalty—unless an exception applies. The IRS recognizes four exceptions where the penalty does not apply: disability, death, first-time home purchase (up to $10,000 lifetime), and substantially equal periodic payments (SEPP). Even with these exceptions, you still owe income tax on the earnings; the exception only waives the 10% penalty.

The disability exception requires that you be unable to engage in any substantial gainful activity due to a physical or mental condition that is expected to result in death or can be expected to last at least 12 months. The Social Security Administration's definition of disability is not the same as the IRS's definition, so you may may have access to for one but not the other. You will need to provide medical evidence to the IRS if you claim this exception.

The first-time home purchase exception allows you to withdraw up to $10,000 of earnings penalty-free (though you still owe income tax on the earnings) if you use the money to buy, build, or rebuild a home and you have not owned a home in the past two years. This is a lifetime limit across all your IRAs, not an annual limit. Once you use the $10,000, you cannot use this exception again, even if you sell the home later.

SEPP is a method of taking substantially equal payments over your life expectancy or the life expectancy of you and a beneficiary. It requires you to follow IRS formulas precisely and continue the payments for at least five years or until you turn 59½, whichever is longer. Breaking the SEPP schedule can trigger back taxes and penalties on all prior withdrawals, so this exception requires careful planning.

Conversions and their own five-year rule

When you convert money from a traditional IRA to a Roth IRA, that converted amount is subject to a separate five-year rule. If you withdraw the converted amount before five years have passed and before age 59½, you owe a 10% penalty on the converted portion (though not on any earnings that have accumulated on top of the conversion since the conversion date). This rule exists because conversions are a way to move pre-tax money into a Roth account, and the IRS wants to prevent people from using conversions as a way to access retirement money early without penalty.

The five-year rule for conversions is measured separately for each conversion. If you convert $10,000 in 2024 and another $10,000 in 2025, the first conversion's five-year period ends in 2029 and the second in 2030. You can withdraw the 2024 conversion penalty-free after 2029, but the 2025 conversion remains subject to the penalty until 2030. This means you need to track each conversion separately and know when each one's five-year period ends.

The converted amount itself is already taxed in the year of conversion at your ordinary income tax rate. The five-year rule for conversions only determines whether you owe an additional 10% penalty if you withdraw before the five years are up. Earnings that accumulate on top of the converted amount are subject to the original account's five-year rule, not the conversion's five-year rule.

What happens if you withdraw earnings early

If you withdraw earnings before your account is five years old, or before you meet an age or circumstance exception, the earnings are taxed as ordinary income at your marginal tax rate. If you are in the 22% federal tax bracket, a $5,000 earnings withdrawal costs you $1,100 in federal income tax. You also owe a 10% early withdrawal penalty ($500 in this example) unless an exception applies, for a total of $1,600 in taxes and penalties on the $5,000 withdrawal.

State income tax may apply as well, depending on where you live. Some states do not tax retirement income, while others tax Roth IRA withdrawals the same way they tax ordinary income. You will need to check your state's rules to know the full tax cost of an early earnings withdrawal.

The penalty is reported on Form 5329, which you file with your tax return. The IRS does not automatically calculate or collect it; you are responsible for reporting the withdrawal and the penalty yourself. If you do not report it, the IRS may assess it later during an audit. The financial institution holding your Roth IRA will send you a Form 1099-R reporting the withdrawal, which will alert the IRS that money came out.

Inherited Roth IRAs and beneficiary withdrawal rules

If you inherit a Roth IRA from someone other than your spouse, the five-year rule and age exceptions do not apply to you in the same way. Instead, you must follow the beneficiary distribution rules, which depend on whether the original account owner had reached their required minimum distribution (RMD) age and whether you are an may be able to access designated beneficiary. The rules changed significantly under the SECURE Act, which took effect in 2020.

If the original owner was under 73 (the current RMD age) when they died, and you are an may be able to access designated beneficiary (spouse, minor child, disabled person, chronically ill person, or someone within 10 years of the deceased's age), you can stretch distributions over your life expectancy. Non-may be able to access beneficiaries must empty the account within 10 years of the owner's death under the SECURE Act rules. Earnings withdrawn by a beneficiary are taxed as ordinary income to the beneficiary, not the estate.

The five-year rule for the original account still applies—if the account was less than five years old when the owner died, earnings withdrawn by the beneficiary are taxed, even if the beneficiary is over 59½. This is one of the harshest rules for inherited Roth IRAs: a beneficiary who is 70 years old still owes income tax on earnings if the original owner had not held the account for five years.

Frequently Asked Questions

Can I withdraw my contributions without paying tax or penalty?

Yes. Your contributions to a Roth IRA always come out tax-free and penalty-free, at any age and at any time. The IRS treats contributions as your own money that you have already paid tax on. Only earnings and conversions are subject to the five-year rule and age restrictions.

What if I withdraw earnings and then put the money back?

You cannot undo a withdrawal by redepositing it. Once money comes out, it is out. You can make a new contribution or conversion in a later year, but that is a separate transaction. If you withdrew earnings early and owe tax and penalty, redepositing does not erase that tax liability.

Do I have to pay tax on Roth IRA earnings if I never withdraw them?

No. Earnings that stay in the account are never taxed, no matter how long you own the account or how large the earnings grow. The tax-free growth is one of the main advantages of a Roth IRA. You only owe tax if you withdraw the earnings and do not meet the withdrawal conditions.

What is the difference between the five-year rule for contributions and the five-year rule for conversions?

The five-year rule for contributions applies to your entire Roth IRA account and determines whether earnings can come out tax-free. The five-year rule for conversions applies to each conversion separately and determines whether the converted amount can come out penalty-free. A conversion's five-year period is measured from the year of the conversion, not from when you opened the account.

If my Roth IRA is five years old but I am only 45, can I withdraw earnings tax-free?

No. You must meet both conditions: the account must be five years old AND you must be 59½, disabled, deceased, or withdrawing for a first-time home purchase (up to $10,000). Meeting only one condition is not enough. At age 45 with a five-year-old account, you can withdraw contributions penalty-free, but earnings are taxed and penalized.