Is a Roth Account Taxed Now or Later?

A Roth account provides tax-free income in retirement. The trade-off is paying taxes on your money now in exchange for not paying them later. Contributions are made with money that has already been taxed, and in return, qualified withdrawals, including investment growth, are received free of federal income tax.

How Roth Contributions Are Taxed

The defining characteristic of a Roth account is that contributions are made with “after-tax” dollars. This means the money you deposit has already been subject to income tax in the year you earned it. The funds typically come from your bank account, which holds earnings from a paycheck after taxes have been withheld. You do not receive an upfront tax deduction for these contributions.

This approach contrasts with traditional pre-tax retirement accounts, which can lower your taxable income for the current year. With a Roth account, the tax payment is front-loaded. The Internal Revenue Service (IRS) sets annual limits on how much you can contribute. For 2025, the maximum contribution is $7,000, or $8,000 if you are age 50 or older.

These contributions must be made from taxable compensation, and your ability to contribute may be limited if your modified adjusted gross income (MAGI) exceeds certain thresholds. For 2025, the ability to contribute is phased out for single filers with a MAGI between $150,000 and $165,000 and for joint filers between $236,000 and $246,000. Filers with a MAGI above these ranges cannot contribute. The deadline for making a contribution for a specific tax year is typically April 15 of the following year.

How Roth Withdrawals Are Taxed

The primary benefit of the Roth structure becomes apparent during retirement. When you take a qualified withdrawal, you pay no federal income tax on the money you take out. This tax-free treatment applies to your original contributions and all the investment earnings the account has generated over the years, including growth from dividends, interest, and capital gains.

This feature is an advantage for those who anticipate being in a similar or higher tax bracket during their retirement years. By paying taxes at your current rate on contributions, you lock in a 0% tax rate on future withdrawals. Unlike traditional retirement accounts, original owners of Roth IRAs are not required to take required minimum distributions (RMDs) at any age, allowing the funds to continue growing tax-free.

Rules for Qualified Tax-Free Withdrawals

For a withdrawal to be considered “qualified” and thus completely tax-free, two specific conditions established by the IRS must be met. Failing to meet both can result in taxes and potential penalties on a portion of the withdrawal.

The first requirement is the 5-year rule. You must have held a Roth IRA for at least five tax years before you can withdraw earnings tax-free. This five-year clock begins on January 1 of the tax year for which you made your very first contribution to any Roth IRA. For instance, if you open a new Roth IRA and make your first contribution for the 2025 tax year on April 1, 2026, the five-year period is considered to have started on January 1, 2025.

The second requirement is that, in addition to satisfying the 5-year rule, you must also be at least 59½ years old at the time of the withdrawal. The IRS provides a few exceptions to the age 59½ rule. Withdrawals of earnings can also be qualified if you become totally and permanently disabled, if the distribution is made to your beneficiary after your death, or for a first-time home purchase up to a $10,000 lifetime maximum.

Tax Treatment of Non-Qualified Withdrawals

If a withdrawal does not meet the criteria for a qualified distribution, it is considered “non-qualified,” and a different set of tax rules applies. The IRS has specific ordering rules that determine which funds are withdrawn first. These rules are favorable, as your contributions are always treated as the first money to come out.

You can withdraw your direct contributions at any time, for any reason, completely free of both income tax and penalties. This is because you already paid tax on this money before you put it into the account. Only after you have withdrawn an amount equal to all of your total contributions do you begin to withdraw investment earnings.

It is this portion—the earnings—that is subject to taxation if withdrawn as part of a non-qualified distribution. These earnings are taxed as ordinary income at your current tax rate. If you are under age 59½, these earnings are typically also subject to a 10% early withdrawal penalty. For example, if you contributed $20,000 to a Roth IRA that grew to $25,000, you could withdraw the first $20,000 at any time without tax or penalty. The remaining $5,000 of earnings, if withdrawn before meeting qualified withdrawal rules, would be taxable and likely subject to the 10% penalty.