How Roth IRA Contributions and Withdrawals Are Taxed

Roth IRA contributions are never taxed, but withdrawals depend on your age and how long you've held the account

You contribute to a Roth IRA with money you've already paid income tax on. That means the IRS doesn't tax your contributions again when you put them in, and it doesn't tax them when you take them back out. The tax advantage of a Roth IRA comes from the earnings — the investment growth inside the account — which can be withdrawn tax-free if you meet two conditions: you must be at least 59½ years old, and you must have owned the Roth IRA for at least five tax years.

If you withdraw earnings before age 59½ or before the five-year mark, those earnings are taxed as ordinary income, and you may owe a 10% early withdrawal penalty on top. Your contributions themselves can always come out penalty-free and tax-free, no matter your age or how long you've had the account.

Key Takeaways

• Contributions to a Roth IRA are made with after-tax dollars and are never taxed again when withdrawn.
• Earnings inside a Roth IRA grow tax-free and can be withdrawn without tax or penalty if you are at least 59½ and have held the account for five tax years.
• Withdrawing earnings before age 59½ or before five years of ownership triggers ordinary income tax plus a 10% early withdrawal penalty.
• The five-year rule applies to each Roth IRA separately, so opening a new account restarts the clock on that specific account.

How the five-year rule works

The five-year rule is tied to the account itself, not to your age or the source of the money. The clock starts on January 1 of the tax year in which you first contribute to any Roth IRA. If you open your first Roth IRA in March 2024, the five-year period runs from January 1, 2024, through December 31, 2028. Once that period ends, you can withdraw earnings tax-free and penalty-free (assuming you're 59½ or older).

If you convert a traditional IRA to a Roth IRA, a separate five-year rule applies to the converted amount. The five-year period for a conversion starts on January 1 of the year you convert, and it applies only to the earnings on that conversion — not to your regular contributions.

If you inherit a Roth IRA from someone else, the five-year rule is based on when they first opened their Roth IRA, not when you inherited it. This is one of the few situations where the original owner's timeline matters to you.

Withdrawing contributions versus earnings

The IRS treats contributions and earnings separately. Your contributions — the actual dollars you put in — can come out at any time, at any age, with no tax and no penalty. This is true even if you haven't owned the account for five years or if you're younger than 59½.

Earnings are the investment gains: interest, dividends, and capital appreciation. If you withdraw earnings before age 59½ and before five years of ownership, you owe income tax on those earnings at your ordinary tax rate, plus a 10% early withdrawal penalty. The penalty is calculated on the earnings only, not on your contributions.

When you withdraw money from a Roth IRA, the IRS assumes you withdraw contributions first. Once contributions are exhausted, any further withdrawals are treated as earnings and subject to the age and five-year rules.

Exceptions to the early withdrawal penalty

The 10% early withdrawal penalty on earnings can be waived in certain situations, though income tax still applies. The IRS allows penalty-free withdrawals of earnings before age 59½ if you use the money for a first-time home purchase (up to $10,000 lifetime), to pay for may have access to education expenses, for a birth or adoption (up to $35,000 per person, per lifetime, starting in 2024), or if you become disabled or face a medical hardship.

You can also withdraw earnings penalty-free if you take substantially equal periodic payments under IRS Rule 72(t), though this requires you to follow a specific formula and continue the payments for at least five years or until age 59½, whichever is longer.

Even when an exception applies and the penalty is waived, you still owe ordinary income tax on the earnings withdrawn. The exception removes only the penalty, not the tax.

Roth conversions and the pro-rata rule

If you convert money from a traditional IRA, SEP IRA, or straightforward IRA to a Roth IRA, the conversion itself is not a taxable event — you don't owe tax on the amount you convert. However, if you have pre-tax money in any traditional IRA accounts, the IRS applies the pro-rata rule, which can create a tax bill.

The pro-rata rule works like this: if you have $50,000 in pre-tax traditional IRA money and $10,000 in after-tax money across all your traditional IRAs, and you convert $10,000 to a Roth, the IRS treats the conversion as 83% pre-tax and 17% after-tax (based on the ratio of pre-tax to total). You would owe income tax on the pre-tax portion of the conversion.

This rule applies across all traditional, SEP, and straightforward IRAs you own — you cannot isolate after-tax money in one account and convert only that. The calculation includes every traditional IRA you have, regardless of which institution holds it.

State and local taxes on Roth IRAs

The federal government does not tax Roth IRA contributions or may have access to withdrawals, but some states do tax retirement account withdrawals. Most states follow federal tax treatment and do not tax Roth IRA withdrawals, but a few states — including Pennsylvania, New York, and Illinois — have their own rules.

Pennsylvania does not tax IRA withdrawals at all. New York taxes withdrawals from traditional IRAs but generally not from Roth IRAs. Illinois taxes neither traditional nor Roth IRA withdrawals. However, state tax law changes, and some states have different rules for residents versus non-residents. If you live in a state with an income tax, check your state's Department of Revenue website or speak with a tax professional about how your state treats Roth IRA withdrawals.

Required minimum distributions and Roth IRAs

Unlike traditional IRAs, Roth IRAs do not require you to take distributions during your lifetime. You can leave the money in the account as long as you live, and it continues to grow tax-free. This is one of the major tax advantages of a Roth IRA.

However, if you inherit a Roth IRA from someone other than your spouse, you must take distributions based on your life expectancy. The rules depend on when the original owner died and whether you are a spouse, child, or other beneficiary. Distributions from an inherited Roth IRA are not taxed if the account met the five-year rule, but the distribution requirement itself is mandatory.

Frequently Asked Questions

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

Yes. Your contributions can be withdrawn at any time, at any age, with no tax and no penalty. The IRS treats contributions as your own money that you've already paid tax on. Only earnings are subject to the age and five-year rules.

What happens if I withdraw earnings before age 59½?

You owe ordinary income tax on the earnings at your tax bracket rate, plus a 10% early withdrawal penalty. The penalty applies only to the earnings, not to your contributions. Some exceptions exist — such as first-time home purchase, education expenses, or disability — that waive the penalty but not the income tax.

Does the five-year rule reset if I open a second Roth IRA?

No. The five-year rule is based on when you first opened any Roth IRA, not on individual accounts. If you opened your first Roth IRA in 2020, the five-year period ends in 2025 for all your Roth IRAs, even if you open a new one in 2024. However, conversions have their own separate five-year rule tied to the conversion date.

Do I owe taxes on a Roth IRA conversion?

The conversion itself is not taxed, but if you have pre-tax money in any traditional IRA, the pro-rata rule may create a tax bill. The rule calculates what percentage of your total IRA balance is pre-tax, and you owe income tax on that percentage of the amount converted. This applies across all your traditional IRAs combined.

What if I live in a state with income tax?

Most states do not tax Roth IRA withdrawals and follow federal tax treatment. However, a few states have different rules. Check your state's Department of Revenue website or consult a tax professional to understand how your state treats Roth IRA distributions.