Understanding the Taxes on Withdrawals from Roth IRA's — The Two 5-Year Rules for Roth IRAs (With Real-World Scenarios)
Roth IRAs are one of the most powerful tools for tax-free growth and eventual tax-free cash-flow (whether in retirement or before) —but only if you understand the rules. Two key “5-year rules” determine whether your Roth IRA withdrawals will be taxed or penalized. Confusion around these rules can lead to unpleasant surprises, especially for early retirees, high-income earners, or anyone converting traditional IRA money to a Roth IRA.
In this guide, we’ll explain the two 5-year rules, walk through the IRS’s ordering rules for Roth IRA withdrawals, and answer common questions with real-life examples.
The Two 5-Year Rules for Roth IRA's
There are two separate 5-year rules that apply to Roth IRAs, and they serve very different purposes:
1. The 5-Year Rule for Determining if EARNINGS are TAXABLE: (Qualified Distributions)
What it applies to: Determines whether earnings in your Roth IRA can be withdrawn tax-free.
When the clock starts: January 1 of the first year you made a Roth IRA contribution (or converted assets to a Roth IRA). For example, if you made your first contribution to a Roth IRA (let's say $100) on August 9th, 2020, your clock would start January 1, 2020 - so the 5-year clock will be satisfied on January 1, 2025.
What it requires:
- The Roth IRA must have been open for at least 5 tax years, AND
- You must have an Exception: Be age 59½, disabled, buying a first home** (up to $10,000 per person), or deceased (your beneficiaries inherit the Roth IRA and take distributions from it).
If both conditions are met, any withdrawals—including earnings—are completely tax-free.
**You can qualify as a first-time homebuyer if you haven’t owned a principal residence in the past two years. If you’re married, your spouse also cannot have owned a principal residence in the past two years. And remember, the $10,000 is a lifetime limit, per spouse. You must use the Roth IRA distribution within 120 days from the day it is received to buy your first home. If things don’t go as planned and the home purchase is delayed or cancelled, you actually have 120 days from the date of the distribution to put the money back into the Roth IRA (normally it's a 60-day deadline for putting back IRA distributions). You will need to claim the withdrawal as an exception on Form 5329 of your tax return.
2. The 5-Year Rule for Determining if Withdrawals are Subject to a 10% Penalty (Penalty-Free Access)
What it applies to: Determines whether you’ll owe the 10% early withdrawal penalty on a) principal amounts converted to a Roth IRA; and b) earnings withdrawn from a Roth IRA
When the clock starts: January 1 of the year you did the Roth conversion.
What it requires:
- A) Conversion Principal: Wait 5 tax years from EACH conversion or qualify for an exception: Over Age 59½, disabled, deceased (taking withdrawals as a beneficiary), part of 72(t) withdrawal plan, first-time home purchase up to $10,000 lifetime limit per person, qualified higher education expenses, birth/adoption expenses up to $5,000, health insurance premiums while unemployed (having received unemployment compensation for 12 consecutive weeks), unreimbursed medical expenses exceeding 7.5% of your gross income, disaster distributions, or 72(t) withdrawal plan)
- B) Earnings: Qualify for an exception: Over Age 59½, disabled, deceased (taking withdrawals as a beneficiary), part of 72(t) withdrawal plan, first-time home purchase up to $10,000 lifetime limit per person, qualified higher education expenses, birth/adoption expenses up to $5,000, health insurance premiums while unemployed (having received unemployment compensation for 12 consecutive weeks), unreimbursed medical expenses exceeding 7.5% of your gross income, disaster distributions, or 72(t) withdrawal plan)
The Roth IRA Withdrawal Ordering Rules
When you take money out of a Roth IRA, the IRS uses a specific order of operations—designed to be favorable to you:
1. Direct Contributions – Always come out first. Never taxed or penalized. Direct contributions are those made from a non-retirement account to a Roth IRA directly. You can only do Direct Roth IRA Contributions if your pre-tax income from all sources ("MAGI") is under the IRS limits ($150k Single / $236k Married in 2025).
2. Roth Conversions:
- A) Taxable portion of conversions (pre-tax dollars converted to Roth)
- B) Non-taxable portion of conversions (after-tax dollars converted to Roth — if done optimally, this is what the Backdoor Roth IRA utilizes)
3. Earnings – Last in line, and subject to the 5-year qualified distribution rule discussed under Rule #1 — 1. The 5-Year Rule for Determining if EARNINGS are TAXABLE: (Qualified Distributions)) above.
This ordering matters. If you’re withdrawing before 59½, tapping only contributions or older conversions can avoid taxes and penalties.
Real-Life Roth Withdrawal Scenarios (Q&A Format)
Let’s walk through various scenarios to help you determine what’s taxed, penalized, or fully tax-free.
🤔 Q1: I’m 35 and made my first Roth IRA contribution 3 years ago in the amount of $6,000. Can I take out $5,000?
A: Yes!
You can always withdraw your contributions (the money you put in) tax- and penalty-free at any time, regardless of age or how long the account has been open.
Since this is a contribution (not earnings), no 5-year rule applies.
✅ No tax. No penalty.
🤔 Q2: I’m 40 and converted $20,000 from a traditional IRA to a Roth IRA 2 years ago. Can I withdraw that $20,000 now without penalty?
A: Not yet.
The 5-year conversion rule applies here.
Because you’re under 59½ and it’s been less than 5 years since the conversion, you’d owe a 10% penalty on the amount withdrawn.
❌ No tax (already paid at conversion), but 10% early withdrawal penalty applies.
🤔 Q3: I’m 62. I made my first Roth IRA contribution at age 60. Can I now withdraw my Roth earnings tax-free?
A: Not yet.
Although you're over 59½, the 5-year qualified distribution rule for earnings still applies.
You’ve only had the account for 2 years—so earnings are taxable until you hit the 5-year mark.
❌ Earnings taxed (at ordinary income rates), but no penalty (because you're over age 59½, which is an exception to the 10% early withdrawal penalty).
🤔 Q4: I’m 61, converted $100,000 from traditional IRA to Roth IRA 3 years ago. Can I withdraw that $100,000 now without taxes or penalties?
A: Yes.
You’re over age 59½, so the 10% penalty rule for conversions doesn’t apply.
You already paid income tax at the time of conversion.
So any withdrawals of those $100,000 converted funds are tax- and penalty-free. You could not withdraw any of the EARNINGS until 5 tax years after converting, however.
✅ But for the $100,000 —No tax. No penalty.
🤔 Q5: I’m 45 and contributed $6,000 per year for the last 10 years. My Roth IRA has doubled and is now worth $120,000. Can I take out $60,000 for a down payment on a house?
A: Yes!
Your total contributions are $60,000, so you can withdraw up to that amount tax- and penalty-free.
If you withdraw more than $60,000, you begin tapping earnings, which may be subject to tax and a 10% penalty unless an exception applies (like first-time home purchase, up to $10,000 of earnings).
✅ First $60,000 = tax- and penalty-free
🟡 Next $10,000 = tax-and-penalty free if used for first-time home purchase.
❌ Anything over $70,000 of withdrawals = income tax and 10% penalty apply
🤔 Q6: I’m 30 and converted $50,000 last year to a Roth IRA. I need $25,000 now for an emergency. What happens?
A: 10% Penalty will apply (10% x $25,000 = $2,500)
You can’t access the converted funds penalty-free unless they’ve been in the Roth for 5 years or you’re over 59½.
You’ll owe a 10% penalty on that $25,000 even though the taxes were already paid.
❌ No tax, but 10% penalty on withdrawn amount.
🤔 Q7: What happens if I do multiple conversions in different years?
A: Each conversion has its own 5-year clock.
If you converted in 2022, 2023, and 2024, each one needs to “age” for 5 years before it's safe from the 10% penalty (if you’re under 59½).
This stacking of conversions can complicate early withdrawals.
🧮 Keep track of each conversion year and its respective 5-year window.
🤔 Q8: I'm 45 and contributed $5,000 per year to my Roth IRA for 10 years in my 30's (total contributions of $50,000). I've also converted $10,000 per year for the last 5 years to my Roth IRA from Pre-Tax IRA (Ages 40 - 45). Between the contributions in my 30's and my conversions the last 5 years, my Roth IRA now totals $200,000. I need $100,000 — how much can I access tax-and-penalty free?
A: $60,000. You can access the $50,000 of contributions into the Roth IRA from your 30's, plus the first $10,000 conversion you did at Age 40 (because it happened >5 years ago). Each year that passes, you'll be able to get tax-and-penalty free access to an additional $10,000 per year for the next 4 years (because each conversion from your 40's will keep hitting its 5-year conversion clock with each year that passes).
🤔 Q9: What if I contributed $50,000 to a Roth 401k for each of the past 5 years, then rolled the Roth 401k over to a Roth IRA when the Roth 401k value grew to $80,000 and I separated from my employer?
A: Assuming you are under Age 59½, you will be able to withdraw $50,000 (your contributions) anytime, tax-and-penalty free. If you opened a Roth IRA for the first-time to do this 401k rollover, a brand new 5-year clock will begin for the Roth IRA and an exception will have to apply (attaining age 59½, first-time homebuyer up to $10,000, disability, or death) in order to access the $30,000 of earnings.
If you were over age 59½, you could take the full $80,000 out tax-and-penalty-free. But let's say you rollover the $80,000 from your Roth 401k to a Roth IRA, and the $80,000 grows to $100,000. You can only access the $80,000 tax-and-penalty-free. The $20,000 of earnings from the time after the rollover into the Roth IRA has to satisfy its own 5-year holding period within the Roth IRA (assuming this was the first time you ever opened and put money into a Roth IRA that is).
IF you had opened a Roth IRA 5 year prior, contributed say $100 to it 5 years ago, then rolled the $80,000 from the Roth 401k to the Roth IRA, and it subsequently grows to $100,000 — you could access the full $100,000 anytime tax-and-penalty free (no need to wait for the 5-years, because you already had money in a Roth IRA for 5 years and you were over age 59½).
🤔 Q10: I'm 40 years old, and I have had a Roth IRA open for >5 years. I've done direct contributions of $50,000 over my lifetime, converted my entire $25,000 Pre-Tax IRA to Roth >5 years ago, and have done Backdoor Roth IRA conversions at $6,000 per year for the last 3 years ($93,000 in collective contributions/conversions). The Roth has grown to $150,000 ($57,000 of earnings). How much can I access tax-and-penalty free?
A: $93,000. The tricky part about this one is that even though the backdoor Roth IRA conversions were done less than 5 years ago (you've been doing them each year for only the past 3 years), there is no 5-year clock attributable to conversions of after-tax dollars (ONLY pre-tax amounts being converted to Roth).
Final Thoughts: Roth IRAs Reward the Patient
Roth IRAs and Roth 401(k)s offer tremendous tax advantages, but understanding the two 5-year rules and withdrawal ordering rules is essential to avoid penalties and surprise tax bills. Whether you're planning early retirement, converting a large IRA, or just getting started—these rules shape how and when you can access your hard-earned money.
If you’re unsure how to strategically structure Roth contributions, conversions, or withdrawals, working with a fiduciary financial planner can ensure you maximize the benefits you reap while minimizing the taxes you pay along the way.
