How Roth IRA Ordering Rules and Withdrawal Tiers Work

When you take money out of a Roth IRA, federal law forces the distribution through a fixed three-tier sequence: your regular contributions come out first, then any conversions and rollovers on a first-in, first-out basis, and finally your earnings. That order is what the Roth IRA withdrawal ordering rules actually do, and it controls whether a given dollar leaves the account tax-free, penalty-free, both, or neither. Because you already paid income tax on your contributions before depositing them, the first tier comes back to you with no tax and no penalty at any age. Consequences only start to matter once a withdrawal is large enough to reach into conversions or earnings.

How the Three-Tier Sequence Works

Under 26 U.S.C. § 408A(d)(4)(B), the IRS treats every Roth IRA distribution as coming from these categories in this exact order:¹

Regular contributions you deposited directly from after-tax income.
Conversions and rollovers from a traditional IRA or employer plan, taken oldest first. Within a single conversion, the taxable portion comes out before any nontaxable portion.
Earnings — interest, dividends, and capital gains generated inside the account.

Each tier must be fully exhausted before the next one is touched. Treasury Regulation § 1.408A-6 states that distributions are “determined as of the end of a taxable year and exhausting each category before moving to the following category.”² You cannot tell your brokerage to pull from a particular tier. The IRS applies the sequence mechanically, regardless of what you or your custodian call the withdrawal.

The rule exists so people can’t cherry-pick tax-free earnings while leaving already-taxed contributions behind. In practice the ordering runs in your favor, because the most tax-friendly money is what leaves first.

Tier One: Your Contributions Come Out First

Regular contributions sit at the base of the sequence because that money was already taxed before it went in. Taking it back is simply a return of your own after-tax dollars, so no income tax and no 10% penalty apply, no matter your age and no matter how long the Roth has been open.³ That is what makes the contribution tier work like a flexible reserve inside a retirement account.

The number that matters for withdrawal purposes is your cumulative lifetime contributions, not any one year’s deposit. If you put in $7,000 a year for six years, you have $42,000 of contribution basis available before the ordering rules step into tier two. The IRS does not keep a running total for you; you have to track it yourself.

Tier Two: Conversions and Rollovers

Once contributions are used up, the next dollars out come from money you converted or rolled over from a pre-tax account like a traditional IRA or 401(k). Conversions come out oldest first, and within any single conversion the taxable portion (the amount you included in income when you converted) leaves before any nontaxable basis.²

Income tax is generally not the issue in this tier. You already paid tax on the taxable portion at conversion, and the nontaxable portion was after-tax basis to begin with. Converted dollars usually leave the Roth without a new tax bill regardless of when you take them.

The Five-Year Conversion Clock

Each conversion carries its own separate five-year holding period. If you are under 59½ and you withdraw converted funds before five years have passed from January 1 of the conversion year, the IRS applies a 10% early distribution penalty to the taxable portion of that conversion.⁴ The rule keeps people from using a conversion as a shortcut to reach pre-tax retirement money penalty-free.

Say you converted $50,000 from a traditional IRA in 2024 and paid the income tax at that time. If you pull that $50,000 out in 2026 while still under 59½, you owe no additional income tax, but you face a $5,000 penalty because the clock does not expire until January 1, 2029. The penalty disappears for that conversion once its five years pass or once you reach 59½, whichever comes first.

Tier Three: Earnings Are Last, and the Rules Are Strictest

Earnings — all the growth inside the account — come out last, and they carry the heaviest restrictions. To withdraw earnings completely tax-free and penalty-free, the distribution has to be “qualified,” which requires two things at once:¹

At least five tax years have passed since January 1 of the first year you (or your spouse) made any Roth IRA contribution.
You have reached age 59½, become permanently disabled, died (with the distribution going to your beneficiary or estate), or are using up to $10,000 for a first-time home purchase.

Both conditions must be met. A 62-year-old who opened a first Roth last year is past 59½ but has not yet cleared the five-year rule, so earnings are not yet qualified. A 45-year-old with a 10-year-old Roth has cleared the five-year rule but not the age test, so earnings would still face tax and penalty absent another qualifying event.

When an earnings withdrawal fails the qualified distribution test, the earnings are taxed as ordinary income, and the 10% early distribution penalty is added if you are under 59½. On a $20,000 earnings withdrawal for someone in the 22% bracket, that could mean $4,400 in federal income tax plus a $2,000 penalty.

One detail that trips people up: the five-year clock for earnings is account-wide and never resets. It starts with your very first Roth contribution across any Roth IRA. Opening a new Roth at a different brokerage does not start a new clock.

Penalty Exceptions When Earnings Aren’t Qualified

Even when an earnings withdrawal is not a qualified distribution, several exceptions can eliminate the 10% penalty. Income tax on the earnings still applies; the exception only waives the penalty. The IRS recognizes these penalty exceptions for IRA distributions before 59½:⁴

Permanent disability that prevents substantial gainful activity.
Up to $10,000 in lifetime distributions for a first-time home purchase.
Qualified higher education expenses for you, your spouse, children, or grandchildren.
Unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
Health insurance premiums paid after job loss, if you received unemployment benefits for at least 12 consecutive weeks.
A series of substantially equal periodic payments, continuing for five years or until 59½, whichever is longer.
Terminal illness certified by a physician as expected to result in death within 84 months.
Domestic abuse victim distributions, up to the lesser of $10,000 (inflation-adjusted) or 50% of the account, for distributions made after 2023.
Up to $5,000 per parent within one year of a child’s birth or the finalization of an adoption.
Distributions taken to satisfy an IRS levy on the account.

People often confuse penalty-free with tax-free. If earnings come out and the distribution is not qualified, income tax on those earnings is still owed even where a penalty exception applies.

Multiple Roth IRAs Are Treated as One Account

If you have Roth IRAs at three different brokerages, the IRS does not treat them as three separate pools. All your Roth IRAs are aggregated into a single account for the ordering rules.¹ Treasury Regulation § 1.408A-6 confirms that “all distributions from all an individual’s Roth IRAs made during a taxable year are aggregated,” and contributions across accounts are combined the same way.²

You cannot isolate contributions in one account and earnings in another and then withdraw only from the contribution account. A $10,000 distribution from Account A is treated the same as one from Account B. Your combined contribution basis across every Roth you own must be used up before any withdrawal from any account is classified as coming from conversions or earnings. Your custodians do not coordinate this tracking; each brokerage reports its own distribution on Form 1099-R and leaves the combining to you.

Inherited Roth IRAs Follow the Same Order

If you inherit a Roth IRA, the same three-tier ordering applies to your distributions: contributions first, conversions next, earnings last.³ What differs is the five-year clock and the timeline for emptying the account.

You inherit the original owner’s five-year aging period rather than starting a new one. If the deceased opened their first Roth in 2019, the clock began January 1, 2019, and was satisfied by January 1, 2024, whenever you inherited. If that period had not yet run when the owner died and you withdraw earnings before it does, those earnings are taxable to you.

For most non-spouse beneficiaries who inherited a Roth after 2019, the whole account must be emptied by the end of the 10th year following the owner’s death.⁵ There is no annual minimum within that window for Roth accounts. Surviving spouses can instead treat the account as their own, and eligible designated beneficiaries (minor children, disabled individuals, and those not more than 10 years younger than the deceased) may have alternatives to the 10-year rule.

Tracking Basis and Reading Your 1099-R

The IRS expects you to know exactly how much you have contributed and converted over the life of every Roth IRA you have ever owned. Your brokerage is not required to maintain that consolidated record for you.

Non-qualified distributions are reported on Part III of IRS Form 8606, which calculates how much of the withdrawal is contributions (tax-free), conversions (potentially penalty-subject), and earnings (potentially taxable and penalty-subject).⁶ You do not need to file Form 8606 just to make a contribution, but keep the records anyway. Hold onto your annual Forms 5498, any Forms 1099-R for years you took a distribution, and every Form 8606 you have ever filed. If you cannot prove your contribution basis in a later audit, the IRS can treat the entire distribution as taxable earnings.

What the Box 7 Codes Mean

Your custodian issues Form 1099-R for the year of the withdrawal and uses a code in Box 7 to classify the distribution. The common Roth codes are:⁷

Code Q: qualified distribution. You met both the five-year rule and a qualifying event. No tax, no penalty.
Code T: you met a qualifying event such as reaching 59½, but the custodian doesn’t know whether the five-year rule is satisfied. You resolve that on your return.
Code J: early distribution with no known exception. This is not a penalty notice. The custodian is reporting the withdrawal and leaving any applicable exception to you to claim on Form 5329.

Seeing Code J on a withdrawal of your own regular contributions is common and does not mean you owe anything. Contributions come out first under the ordering rules, so no tax or penalty results even when the code on the form looks alarming.

1
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
2
eCFR. 26 CFR 1.408A-6 – Distributions
3
Internal Revenue Service. Publication 590-B – Distributions From Individual Retirement Arrangements
4
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
5
Internal Revenue Service. Retirement Topics – Beneficiary
6
Internal Revenue Service. Instructions for Form 8606
7
Internal Revenue Service. Instructions for Forms 1099-R and 5498