Do You Get Taxed on a Roth IRA?

A Roth Individual Retirement Arrangement (IRA) helps individuals prepare for retirement with a distinct tax advantage. Unlike traditional IRAs, where contributions might be tax-deductible in the present, a Roth IRA operates on a different principle. Contributions to a Roth IRA are made with money that has already been taxed, meaning there is no immediate tax deduction for the funds you contribute. This upfront tax payment allows for a significant benefit later: qualified withdrawals in retirement are entirely tax-free.

This unique tax treatment makes the Roth IRA particularly appealing for those who anticipate being in a higher tax bracket during their retirement years than they are currently. The Roth IRA stands apart by offering tax-free growth and tax-free distributions under specific conditions.

How Roth IRAs are Taxed

The fundamental tax principle of a Roth IRA centers on its “after-tax” contribution model. The primary benefit of funding a Roth IRA is the tax-free growth of your investments within the account. Any earnings generated from your contributions, such as interest, dividends, or capital gains, accumulate without being subject to annual taxation.

Eligibility to contribute is subject to income limitations set by the Internal Revenue Service (IRS). If your modified adjusted gross income (MAGI) exceeds certain thresholds, your ability to contribute to a Roth IRA may be reduced or eliminated for that tax year. For instance, in 2025, single tax filers with a MAGI above $165,000, or married couples filing jointly with a MAGI above $246,000, may face restrictions on their ability to contribute.

Tax-Free Qualified Distributions

To receive tax-free benefits, Roth IRA distributions must be “qualified.” A qualified distribution meets two conditions. First, the distribution must occur after the five-year period beginning with the first tax year a contribution was made to any Roth IRA. This five-year rule starts on January 1 of the initial contribution year. It is a single, lifetime five-year period that applies across all Roth IRAs you own.

Second, the distribution must meet one of several specific qualifying events. One such event is the account owner reaching age 59½. If both the five-year rule and the age 59½ requirement are satisfied, all withdrawals, including both contributions and earnings, become completely tax-free and penalty-free.

Another qualifying event allows for tax-free and penalty-free withdrawals if the account owner becomes disabled. The Internal Revenue Service (IRS) defines disability as a medically determinable physical or mental impairment preventing substantial gainful activity, expected to result in death or be of long, continued, and indefinite duration.

Funds from a Roth IRA can also be withdrawn tax-free and penalty-free for a qualified first-time home purchase. This exception permits a lifetime withdrawal of up to $10,000 of earnings, in addition to any contributions, for the purchase of a first home for yourself, your spouse, child, grandchild, or parent. To qualify, the funds must be used for qualified acquisition costs within 120 days of the withdrawal.

Finally, distributions made to a beneficiary after the Roth IRA owner’s death are generally qualified, provided the five-year rule was met by the original owner. While beneficiaries typically do not face the 10% early withdrawal penalty, the tax-free nature of the earnings depends on the original account’s aging period. Under the SECURE Act, most non-spouse beneficiaries are subject to a “10-year rule,” requiring the entire inherited Roth IRA balance to be distributed by December 31 of the tenth year following the original owner’s death. Spouses, however, often have more flexibility, including the option to roll over the inherited Roth IRA into their own.

Taxable and Penalized Non-Qualified Distributions

When a Roth IRA distribution does not meet the criteria for a qualified distribution, certain portions may become taxable and subject to penalties. The IRS employs “ordering rules” for withdrawals: first, regular contributions; then converted amounts; finally, earnings. Contributions can always be withdrawn tax-free and penalty-free, as they were made with after-tax dollars.

If a distribution draws from the converted amounts, it may also be tax and penalty-free, provided each conversion has satisfied its own separate five-year waiting period. If you convert funds from a traditional IRA to a Roth IRA, you must wait five years from the beginning of the tax year of that specific conversion before withdrawing those converted amounts tax-free, even if your original Roth IRA has already met its five-year rule. Failure to meet this separate five-year rule for conversions can result in the 10% early withdrawal penalty on the converted amount if the account owner is under age 59½.

Any withdrawal that includes earnings and does not meet the definition of a qualified distribution will be subject to income tax. If the account owner is under age 59½ and none of the specific exceptions apply, a 10% early withdrawal penalty will also be assessed on the earnings portion of the non-qualified distribution.

The 10% early withdrawal penalty on earnings may be waived in certain situations, even if the distribution is not fully qualified. These exceptions include withdrawals for unreimbursed medical expenses exceeding 7.5% of adjusted gross income, payments for health insurance premiums while unemployed, or distributions for qualified higher education expenses. Additionally, penalty-free withdrawals are permitted for qualified birth or adoption expenses, up to a $5,000 lifetime limit per individual. While these exceptions can prevent the penalty, the earnings portion of such non-qualified distributions may still be subject to ordinary income tax.