Roth IRA Early Withdrawal Penalty and the Five-Year Rule

The Roth IRA early withdrawal penalty and the five-year rule work together, but they answer different questions. The 10% penalty is a federal surtax on early distributions of earnings (and on the taxable portion of recent conversions) when you’re under 59½. The five-year rule decides whether earnings you pull out are fully tax-free and whether a conversion has aged long enough to escape the penalty. Your regular contributions sit outside both: you can take them back at any age, at any time, with no tax and no penalty.¹

What Comes Out First

You don’t get to choose which dollars leave your Roth IRA. The IRS applies a fixed order, and it works in your favor.²

Regular contributions come out first. You already paid tax on this money, so every dollar is tax-free and penalty-free, whatever your age and however long the account has been open.
Converted amounts come out next, oldest conversion first. Within a conversion, the taxable portion (the pre-tax money you paid income tax on when you converted) leaves before any non-taxable portion.
Earnings come out last. This is the only bucket that can trigger both income tax and the 10% penalty.

The practical effect: if you’ve contributed $40,000 over the years, you can withdraw up to $40,000 without touching the five-year rule or the penalty at all. Trouble starts only when a withdrawal exceeds total contributions and cuts into conversions or earnings.

The Five-Year Rule for Contributions

For an earnings withdrawal to be completely tax-free, your Roth IRA has to clear a five-year waiting period. The clock starts on January 1 of the tax year for which you made your first-ever Roth IRA contribution, not the date the money hit the account.² Open a Roth in March 2026 and designate the contribution for tax year 2025, and your clock started January 1, 2025. The rule is satisfied January 1, 2030.

You only get one clock. Open a second Roth at another brokerage a decade later and the original clock still governs. It’s a lifetime rule tied to you, not to any specific account.

This rule controls the tax-free treatment of earnings. It does not restrict contributions themselves, which you can always pull back out.¹

The Five-Year Rule for Conversions

Moving money from a traditional IRA or 401(k) into a Roth IRA starts a separate five-year clock, and each conversion gets its own. Convert $50,000 in 2024 and another $30,000 in 2026, and the two amounts carry independent five-year holding periods that start on January 1 of the year of each conversion.² Unlike a contribution, a conversion cannot be backdated to a prior tax year.

The reason the conversion clock exists: when you convert, you pay income tax that year on the converted amount. Without a separate holding rule, someone under 59½ could convert pre-tax funds, immediately withdraw them, and dodge the 10% penalty that would have applied to a straight early distribution from the original account. To close that door, the taxable portion of a conversion withdrawn within five years is subject to the 10% penalty if you’re under 59½.²

Tracking these timelines is on you. The IRS doesn’t send reminders, and your custodian may not tag which conversion a given dollar came from. Anyone running annual backdoor Roth conversions should keep meticulous records.

When the 10% Penalty Actually Applies

The 10% additional tax hits Roth IRA money in two situations:³

You’re under 59½ and you withdraw earnings before the account’s five-year rule is satisfied. You owe income tax on those earnings and the 10% penalty on top.
You’re under 59½ and you withdraw the taxable portion of a conversion within five years of that conversion. The penalty applies to that amount.²

The 10% is just the penalty. It stacks on top of ordinary income tax. In the 22% bracket, a $10,000 non-qualified earnings withdrawal costs $2,200 in income tax plus $1,000 in penalty, or $3,200 total.

Over 59½ but Within Five Years

Late starters run into a specific wrinkle. If you’re past 59½ but your first Roth IRA is less than five years old, an earnings withdrawal escapes the 10% penalty (you meet the age test) but is still subject to regular income tax. The distribution isn’t fully qualified until both conditions are met. Open your first Roth at 58 and your earnings won’t come out completely tax-free until 63, even though the penalty falls away at 59½.

Exceptions That Waive the 10% Penalty

Several situations let you avoid the penalty on an early withdrawal of earnings or a recent conversion. Income tax on earnings still applies if the five-year rule isn’t satisfied; only the 10% surtax is waived. The IRA exceptions are:³

First-time homebuyer, up to $10,000 over your lifetime, for a principal residence for you, your spouse, child, grandchild, or parent. “First-time” means no ownership of a principal residence in the past two years, and the funds must be used within 120 days.⁴
Total and permanent disability, defined narrowly as inability to engage in any substantial gainful activity due to a condition a physician expects to be long-lasting or fatal.
Terminal illness, following a physician’s certification, for distributions made after the date of certification.
Death of the account owner. Distributions to beneficiaries are penalty-free (the five-year rule still governs whether earnings are taxable).²
Unreimbursed medical expenses above 7.5% of your adjusted gross income (only the amount above the threshold), whether or not you itemize.⁵
Health insurance premiums while unemployed, if you received unemployment compensation for at least 12 consecutive weeks. The withdrawal can occur in the year of unemployment or the following year.
Qualified higher education expenses (tuition, fees, books, supplies, and room and board for at-least-half-time students) for you, your spouse, children, or grandchildren, paid in the same calendar year.
Substantially equal periodic payments under Rule 72(t). You commit to a schedule based on life expectancy and must continue for at least five years or until 59½, whichever is later. Modify the schedule early and the IRS retroactively applies the 10% penalty to every distribution taken, plus interest.⁵
Birth or adoption of a child, up to $5,000 combined across all your retirement accounts, taken within one year. An eligible adoptee must be under 18 or physically or mentally incapable of self-support. You can later repay the amount as a rollover.
Domestic abuse by a spouse or domestic partner, effective for distributions after December 31, 2023, up to the lesser of $10,000 (indexed for inflation) or 50% of the account balance.
Emergency personal expenses, up to $1,000 (or the balance above $1,000, if less), one per calendar year. You cannot take another for three years unless you repay the prior amount or make equivalent new contributions.

Inherited Roth IRAs

Inheriting a Roth IRA does not restart the five-year clock. You inherit the original owner’s timeline. If the deceased opened their first Roth in 2020 and you take a distribution in 2025, the five-year rule is already satisfied, and earnings can come out fully tax-free.

A surviving spouse who elects to treat the inherited account as their own gets an extra edge: the five-year period is met at the earlier of the deceased’s clock or the surviving spouse’s own Roth IRA clock. If the spouse already had a Roth open five years, the inherited earnings are immediately eligible for tax-free treatment.

For a non-spouse beneficiary, any personal Roth IRA you own runs on its own separate clock. The inherited account follows the deceased owner’s timeline, not yours.

1
Internal Revenue Service. Roth IRAs
2
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
3
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
4
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
5
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts