Roth IRA qualified withdrawals are federal tax-free, while early or unqualified withdrawals can trigger income tax and a 10% penalty.
Roth IRA tax rules aren’t hard, yet they’re easy to misread. The IRS treats your account like layers: contributions, conversions, then earnings. The layer you reach decides the tax bill.
This walkthrough keeps it practical. You’ll see what “qualified” means, how the five-year clock works, when the 10% penalty shows up, and what to keep in your records so your return matches reality.
How Roth IRA Taxes Work On Contributions And Growth
Roth IRA contributions go in after income tax. You don’t get a deduction for a standard Roth IRA contribution, so those deposits create your basis—money that already faced tax.
Inside the Roth IRA, dividends and gains aren’t taxed each year. The tax decision waits until you take a distribution. The IRS overview page gives the plain definition and links to the deeper rules. IRS Roth IRAs
Basis And Earnings Are Not Taxed The Same Way
Two buckets drive almost every Roth IRA tax outcome:
- Basis: your regular contributions, plus conversion amounts you already reported as taxable.
- Earnings: growth on top of basis.
Basis can often come out with no tax. Earnings can be tax-free too, but only when the withdrawal is qualified.
What Makes A Roth IRA Withdrawal Tax-Free
A Roth IRA distribution is tax-free at the federal level when it is a qualified distribution. That label depends on two tests used together:
- Five-year test: at least five tax years have passed since your first Roth IRA contribution year.
- Trigger test: the distribution happens after age 59½, after death (to a beneficiary), after disability under IRS rules, or for a first-time home purchase up to $10,000.
Publication 590-B is the IRS rulebook for Roth IRA distributions, including the five-year test and what counts as qualified. IRS Publication 590-B
How The Five-Year Clock Starts
The clock starts with your first Roth IRA contribution for a tax year. A deposit you make in April for the prior tax year still starts the clock at January 1 of that prior year.
If you own multiple Roth IRAs, the IRS treats them as one combined Roth IRA for the five-year test. A newer account does not reset your start year.
Roth IRA Withdrawal Ordering Rules And Tax Outcomes
When you take money out, you can’t point at a dollar and label it “earnings.” The law forces an order. Distributions come out like this:
- Regular contributions
- Conversions (taxable conversion amounts first, then nontaxable conversion amounts)
- Earnings
This ordering is why many early withdrawals end up tax-free: if you stay inside the contribution layer, you’re pulling basis.
When A Roth IRA Withdrawal Gets Taxed
Income tax shows up when your withdrawal reaches the earnings layer and the distribution is not qualified. In that situation, the earnings portion is generally included in taxable income.
The 10% early distribution penalty is a separate charge. It can apply to the taxable portion of an early distribution when you are under age 59½ and no exception fits.
Penalty Exceptions The IRS Recognizes
The 10% early distribution penalty does not hit every early withdrawal. The IRS lists multiple exceptions across IRA rules. In Roth IRA terms, the exception only matters for the portion that would otherwise be penalized, such as taxable earnings or a conversion amount still inside its five-year window.
Common exceptions people run into include disability, death (for beneficiaries), certain higher-education costs, certain medical expenses, and qualified first-time homebuyer distributions up to the $10,000 limit. The details and the definitions live in Publication 590-B, so check the wording before you rely on an exception.
Common Scenarios And The Usual Result
Use the table as a quick map. Then apply your own numbers using the ordering rules.
| Scenario | Federal Income Tax On Earnings | 10% Early Penalty |
|---|---|---|
| Withdraw only regular contributions (any age) | No | No |
| Withdraw earnings after age 59½ and five-year test met | No | No |
| Withdraw earnings after age 59½ but five-year test not met | Yes | No |
| Withdraw earnings before age 59½ and five-year test not met | Yes | Yes, unless an exception fits |
| Withdraw converted principal within 5 years of that conversion (under 59½) | No | Yes, unless an exception fits |
| Withdraw converted principal after 5 years from that conversion | No | No |
| First-time home purchase: earnings, Roth open 5 years | No | No |
| Beneficiary withdrawal after owner’s death (Roth open 5 years) | No | No |
Roth IRA Conversions And The Second Five-Year Rule
A conversion moves money from a traditional IRA (or certain employer plans) into a Roth IRA. If the converted money was pretax, the conversion adds taxable income in the year you convert.
Conversions also carry a five-year window that can affect the 10% penalty. Each conversion amount has its own five-year period. If you withdraw converted principal too soon and you are under 59½, the 10% penalty can apply, yet that principal is not taxed again.
This is separate from the qualified distribution five-year test for earnings. Publication 590-B explains both concepts and keeps the terms straight. 590-B conversion rules
Tax Forms And Records That Keep You Out Of Trouble
Roth IRA distributions are reported by the custodian on Form 1099-R. The form includes a distribution code that hints at whether the payer thinks it was qualified. Still, your five-year start year and your basis decide the final tax result.
Form 8606 is used to report Roth conversions and Roth IRA distributions in certain cases. It is also a core place where basis gets documented over time. The IRS page for the form spells out when it is required. IRS Form 8606
What To Track Year To Year
- Your Roth IRA contribution amount for each tax year (not just the deposit date)
- Conversion dates and amounts, with a note on what part was taxed in the conversion year
- Prior Forms 8606, if filed
- Form 5498 and annual statements from your custodian
If you ever switch custodians, this history is what lets you prove your basis across accounts.
Inherited Roth IRA Taxes And The 10-Year Payout Rule
Roth IRA owners do not have required minimum distributions during their lifetime. After death, beneficiaries can face payout rules tied to the SECURE Act era. Many designated beneficiaries must empty the inherited IRA by the end of the tenth year after the owner’s death year, with exceptions for eligible designated beneficiaries.
The IRS required minimum distribution FAQ spells out the 10-year rule and the exception categories. IRS RMD FAQs
Taxability is a separate question. If the owner satisfied the Roth five-year test before death, distributions to the beneficiary are generally federal tax-free. If the Roth was not yet five years old, the earnings portion can be taxable until that five-year period is met.
Steps To Reduce Taxes Before You Take A Roth IRA Distribution
Most Roth IRA “surprise taxes” come from withdrawing earnings without meeting the qualified distribution tests, or from pulling converted principal inside its five-year penalty window. These steps keep you clear:
- Start with the layer you will reach. Compare your withdrawal amount to your total regular contributions and remaining conversion principal.
- Check your Roth start year. If the five-year test is not met, treat earnings as taxable until it is.
- Check age 59½. Under 59½ raises the odds that a taxable portion also faces the 10% penalty.
- Check conversion dates. Converted principal taken inside five years can trigger the 10% penalty under 59½.
- Decide on withholding. If part of the distribution will be taxable, a small amount of withholding can prevent an unpleasant tax bill later.
State Taxes And Withholding Choices
Federal rules set the baseline, then your state may add its own layer. Many states follow the federal treatment for qualified Roth IRA distributions, yet state law can differ on retirement income, credits, and filing rules. If you moved during the year, residency timing can affect which state taxes the distribution.
Withholding is also a choice point. A qualified distribution is not federal-taxable, so federal withholding is often zero. If part of the distribution will be taxable, choosing some withholding can keep the payment closer to what you will owe when you file.
Roth IRA Tax Checklist Before You Submit A Withdrawal Request
This checklist is meant to be used in the moment, right before you click “sell” or “withdraw.” It keeps the rules in front of you.
| Checkpoint | What To Check | What It Changes |
|---|---|---|
| Five-year test start | Your first Roth IRA contribution tax year | Whether earnings can be tax-free |
| Age 59½ | Your age on the distribution date | Qualified status and penalty risk |
| Contribution basis | Total regular contributions across all Roth IRAs | Whether you reach earnings |
| Conversion windows | Whether a conversion is under five years old | Penalty risk on converted principal |
| Reason for early withdrawal | Whether an IRS exception applies | Whether the 10% penalty drops off |
| Tax form plan | Whether Form 8606 is needed for your case | How the distribution is reported |
One Last Reality Check
If you withdraw only regular contributions, the distribution is usually federal tax-free. If you withdraw earnings, confirm both the five-year test and a qualifying trigger like age 59½. If either one is missing, expect the earnings portion to be taxable, with a 10% penalty risk when you are under 59½.
Once you treat the Roth IRA as layers, the result stops being a mystery. You can run the rules on paper before you move a single dollar.
References & Sources
- Internal Revenue Service (IRS).“Roth IRAs.”IRS overview of Roth IRA basics, contribution rules, and links to distribution guidance.
- Internal Revenue Service (IRS).“Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs).”IRS rules for qualified Roth IRA distributions, ordering rules, conversions, and tax and penalty treatment.
- Internal Revenue Service (IRS).“About Form 8606, Nondeductible IRAs.”When to file Form 8606 for Roth conversions and Roth IRA distributions.
- Internal Revenue Service (IRS).“Retirement Plan and IRA Required Minimum Distributions FAQs.”Inherited IRA payout rules, including the 10-year rule and exception categories.