Do You Pay Taxes on a Roth IRA Withdrawal? The Five-Year Rule

Whether you pay taxes on a Roth IRA withdrawal depends on what you’re pulling out and when. The money you personally contributed always comes back to you tax-free and penalty-free, at any age, for any reason. Investment earnings are different: they can be taxed as ordinary income and hit with a 10% penalty if you take them out before the account has been open five years or before you turn 59½. Most partial withdrawals never reach the earnings layer at all, which is why many Roth withdrawals cost nothing.

Which Dollars Come Out First

You don’t get to pick which dollars leave your Roth IRA. The IRS applies a fixed three-tier order to every distribution, and that order is what determines whether tax is owed.

  • Regular contributions come out first. Because you funded them with money you’d already paid income tax on, they’re always tax-free and penalty-free.
  • Converted or rolled-over amounts come out next, oldest conversion first, with the taxable portion of each conversion ahead of the nontaxable portion.
  • Earnings come out last. This is the only layer that can trigger federal income tax or the 10% early withdrawal penalty.

The practical effect is forgiving. Say you’ve contributed $50,000 over the years and the account is now worth $70,000. A $20,000 withdrawal is pulled entirely from your contribution base and costs you nothing. You would have to withdraw more than $50,000 before any earnings came into the picture. The accounting lives on IRS Form 8606 with your return.1Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements

When Earnings Come Out Tax-Free

Earnings escape tax only when the withdrawal is a “qualified distribution.” Two conditions have to be satisfied at the same time.2Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs

The Five-Year Clock

Your first Roth IRA must have been open for at least five tax years. The clock starts on January 1 of the tax year you made your first contribution, not the day you deposited the money. Open your first Roth in April 2022 and designate the contribution for 2021, and the five-year window began January 1, 2021 and ends December 31, 2025.

The clock applies across all your Roth IRAs. A newer Roth inherits the start date of your oldest one, so you only satisfy the five-year rule once in your life.

A Qualifying Trigger

Along with the five-year period, the withdrawal has to be caused by one of these:

  • Reaching age 59½. Once you cross this line and the five-year clock has run, every withdrawal is tax-free for the rest of your life.
  • Death of the account owner. Beneficiaries receive distributions tax-free as long as the original owner’s five-year period was met.
  • Total and permanent disability under the tax code’s definition.
  • First-time homebuyer expenses, capped at $10,000 of earnings over your lifetime. “First-time” is defined broadly: it covers anyone who hasn’t owned a principal residence in the prior two years.

Meet both pieces and the entire withdrawal, earnings included, is free of federal tax and penalty. Miss either one and the earnings portion is “non-qualified.”

What a Non-Qualified Earnings Withdrawal Costs

Non-qualified earnings get hit twice. First, the earnings are added to your gross income and taxed at your ordinary income rate, just like wages. Second, if you’re under 59½, the IRS adds a 10% early withdrawal penalty on top.3Internal Revenue Service. Traditional and Roth IRAs

A worked example makes the cost concrete. Someone in the 24% bracket who withdraws $10,000 of non-qualified earnings owes $2,400 in income tax plus a $1,000 penalty. A third of the withdrawal is gone. That math is why advisors treat early earnings withdrawals as a last resort.

The ordering rules remain your friend here. Contributions still come out first, tax-free. The tax hit only shows up once you’ve drained more than your total contributions and conversions.

The Separate Clock on Conversions

Roth conversions have their own five-year rule, and it works differently from the one above. Each conversion starts its own five-year clock on January 1 of the year the conversion was done. Pull the taxable portion of that converted amount out before five years have passed, while you’re still under 59½, and the 10% penalty applies.1Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements

You don’t owe income tax a second time on the converted principal, because you already paid it in the year of the conversion. The penalty is the issue. The rule exists so people can’t use conversions as a workaround to tap pre-tax retirement money penalty-free before 59½.

If you’ve done conversions in several different years, each has its own five-year window, and the ordering rules require earlier conversions to be treated as withdrawn before later ones. Getting the tracking wrong can mean paying penalties you don’t owe or missing ones you do.

Life Events That Remove the 10% Penalty

Even when earnings are non-qualified, certain situations eliminate the 10% penalty. These exceptions only waive the penalty; the earnings portion is still added to your taxable income. On a large withdrawal, dodging the 10% surcharge still matters.4Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions

  • Unreimbursed medical expenses above 7.5% of your adjusted gross income. Only the amount over that threshold is penalty-free.
  • Health insurance premiums while unemployed, if you’ve received unemployment compensation for at least 12 weeks.
  • Substantially equal periodic payments. You commit to a series of roughly equal annual withdrawals based on your life expectancy and must keep taking them for at least five years or until you reach 59½, whichever is later. Breaking the schedule retroactively triggers penalties on the earlier distributions.
  • Higher education expenses for you, your spouse, or your children, including tuition, fees, books, and room and board.
  • First-time homebuyer expenses up to $10,000 lifetime.
  • Amounts seized by the IRS to satisfy a tax debt.
  • Up to $5,000 per child within one year of a birth or finalized adoption.
  • Qualified reservist distributions during active duty of at least 180 days.

Since 2024, SECURE 2.0 added more:

  • One emergency personal expense withdrawal per calendar year, capped at the lesser of $1,000 or your vested balance above $1,000. You can repay it to restore your retirement savings.
  • Domestic abuse survivor withdrawals up to the lesser of $10,000 or 50% of your account balance, within 12 months of the abuse, with three years to repay. You self-certify.
  • Federally declared disaster losses up to $22,000, with three years allowed for repayment.5Internal Revenue Service. Retirement Plans and IRAs Under the SECURE 2.0 Act of 2022

None of these turn a non-qualified distribution into a qualified one. If the five-year rule or the 59½ age bar isn’t met, the earnings portion is still taxable income, even though the 10% is waived.

Inherited Roth IRAs

When a Roth owner dies, beneficiaries generally receive distributions tax-free, but the rules on when they must take them depend on who’s inheriting.6Internal Revenue Service. Retirement Topics – Beneficiary

A surviving spouse has the most flexibility. Rolling the inherited Roth into their own Roth treats the account as if it had always been theirs, and the original owner’s five-year clock carries over. If the deceased had already satisfied the five-year rule, the spouse can take qualified distributions right away, assuming they’re at least 59½. No lifetime required minimum distributions apply, same as any other Roth they own. A spouse can also keep it as an inherited IRA and take distributions over their own life expectancy, which can suit a younger spouse who wants a longer stretch.

Most non-spouse beneficiaries who inherited after 2019 must empty the account by December 31 of the 10th year after the owner’s death. There’s no annual minimum along the way; the balance just has to reach zero by that date. If the original owner had satisfied the five-year holding period, every dollar comes out tax-free, earnings included. If the five-year period hadn’t been met at the time of death, earnings taken before the clock runs out are taxable, though contributions and conversions still come out tax-free.7Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs

A few beneficiaries can skip the 10-year deadline and stretch distributions over their own life expectancy: minor children of the owner (the 10-year clock starts when they reach the age of majority), disabled or chronically ill individuals, and beneficiaries no more than 10 years younger than the deceased.

Missing the 10-year deadline triggers an excise tax of 25% on the amount that should have been withdrawn, dropping to 10% if the shortfall is corrected within two years.

Rollover Mistakes That Create a Surprise Tax Bill

Moving money between Roth IRAs can trigger tax if you handle it wrong. A direct trustee-to-trustee transfer, where one institution sends the money straight to another, isn’t treated as a distribution at all and is the safest route.8Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions

An indirect rollover, where the check comes to you first, is riskier. You have 60 days to redeposit the money into another IRA or retirement plan. Miss that window and the IRS treats the whole amount as a distribution, which can mean income tax on earnings and the 10% penalty if you’re under 59½.

There’s also a one-per-year cap on indirect rollovers. The IRS aggregates all your IRAs, traditional and Roth, and permits only one indirect rollover across all of them in any 12-month period. A second indirect rollover inside that window becomes a taxable distribution. Direct transfers don’t count against the limit.

What About State Taxes

Federal rules are only half the picture. If your distribution is qualified at the federal level, it’s also tax-free in every state. Non-qualified earnings that get included in your federal gross income are usually included in state income too, and the rate depends on where you live. Nine states have no income tax at all; most others tax non-qualified earnings at their ordinary rates, which run from under 1% to over 13% at the top. Some states offer partial exclusions for retirement income. Before taking a large early withdrawal, checking your state’s treatment can prevent an ugly surprise on the state return.