Roth IRA withdrawal rules (2024)

For investors and savers whose goal is a comfortable retirement, the term “tax-free” is irresistible. For that reason, Roth individual retirement accounts (IRAs) have become an increasingly popular way to accumulate a retirement nest egg. That’s because withdrawals from the accounts generally are free from income and capital gains taxes, as long as certain conditions are met.

While Roth IRA withdrawal rules are less complicated than traditional IRA withdrawal rules, there are a few wrinkles worth examining.

Understanding Roth IRA withdrawal rules

The Roth IRA, first available in 1998, turned the traditional IRA inside out, based on the idea that some people may prefer to pay taxes now rather than later.

Unlike a traditional IRA, in which contributions are made tax-free and withdrawals are taxed in retirement, contributions to a Roth IRA are made with after-tax dollars. Any earnings in a Roth IRA, whether through interest, dividends or appreciation, also grow tax-free.

And while Roth IRA withdrawals generally are tax-free, some conditions and restrictions may apply due to two requirements of the Internal Revenue Service (IRS).

Withdrawal conditions

First, the Roth IRA owner must make their first contribution to the account at least five years before withdrawals are permitted without penalties. Second, the owner must be at least 59 1/2 before they are able to make withdrawals of any gains in the account without penalty.

Due to these restrictions, you may find yourself in one of the following scenarios as you look to make withdrawals from your Roth IRA.

Under 59 1/2 with an account less than five years old

What happens if the Roth IRA owner makes a withdrawal from the account before the five-year mark and he or she is under age 59 1/2? In that case, the IRS imposes a 10% penalty on any gains withdrawn, and that amount also becomes subject to income tax.

Fortunately, the IRS will waive the penalty in several cases. Within limits, early withdrawals for a first-time home purchase, education costs or expenses in connection with the birth or adoption of a child are a few of the major reasons penalties might be waived.

Under 59 1/2 with an account five years old or more

If the holder has met the five-year requirement but is younger than 59 1/2, he or she still will have to pay the 10% penalty and income taxes on the gains withdrawn. However, they may be able to avoid the penalty if they have a qualified exception, including those listed above.

Over 59 1/2 with account less than five years old

If the Roth IRA owner is over 59 1/2 and makes a withdrawal before the five-year mark, they will pay income taxes on the earnings they withdraw, but no penalty.

Over 59 1/2 with account five years old or more

If the Roth IRA owner is over 59 1/2 and makes a withdrawal from an account that is five years old or more, they do not pay income taxes on the earnings they withdraw, and there are no penalties.

The IRS provides an interactive questionnaire to help determine if Roth IRA withdrawals are subject to tax.

About the five-year rule

The so-called Roth IRA five-year rule — the requirement that a holder must make their first Roth IRA contribution at least five years before being allowed to make withdrawals without penalties — may cause confusion because the five years aren’t necessarily calendar years, but tax years.

For example, let’s say someone opened a Roth IRA and made a contribution for the 2022 tax year. That contribution could have been made up to April 18, 2023, which was the tax filing deadline for 2022.

Although the contribution may have been made in 2023, the five-year clock would start ticking on January 1, 2022, because the contribution was for the 2022 tax year. That means the five-year period for this investor would end December 31, 2026, and they could make penalty-free withdrawals (assuming they were over 59 1/2) any time after January 1, 2027.

Roth IRA versus traditional IRA: Withdrawal rules comparison

Traditional IRA contributions and earnings on those contributions through dividends, interest and appreciation in the value of investments are taxed as ordinary income when withdrawals are made in retirement.

The idea behind traditional IRAs is that by deferring taxes until retirement, you’re more likely to be in a lower income tax bracket and therefore pay less tax on the contributions and earnings that have grown tax-free.

However, both traditional and Roth IRAs require that holders be at least 59 1/2 years of age before they are able to withdraw funds without penalty. Aside from that age restriction, traditional IRAs have no waiting period before funds can be withdrawn.

Roth IRAs, however, mandate a five-year holding period before withdrawals can be made without penalty (so long as the holder is over 59 1/2).

Once the five-year rule is met and the holder is over 59 1/2, there are no restrictions on how much can be withdrawn tax-free from a Roth IRA.

Once past 59 1/2, holders of traditional IRAs may begin taking penalty-free withdrawals. Once owners start taking withdrawals, they must comply with the required minimum distribution (RMD) rules set by the IRS and based on life expectancy. RMDs must begin in the year the traditional IRA owner turns 73. All traditional IRA distributions are treated as ordinary income for tax purposes.

The reason traditional IRA distributions are taxed as ordinary income is because income taxes were never paid on contributions. Traditional IRAs provide a way for contributions and any gains through appreciation, dividends and interest to grow without being taxed during the period of accumulation.

But, like Roth IRAs, traditional IRAs aren’t a way to escape taxation. With traditional IRAs, taxation occurs at the time of withdrawal, and RMDs are intended to make sure that taxes are paid.

What happens when the Roth IRA owner dies?

After the death of a Roth IRA owner, the RMD requirements of traditional IRAs become effective as if the Roth IRA owner passed away prior to their required beginning date.

The IRS states that the entire Roth IRA must be distributed by the end of the fifth or tenth calendar year after the year of the owner’s death unless the interest is payable to an eligible designated beneficiary over the life or life expectancy of that person.

The complex rules that apply to IRA beneficiaries, including distributions that aren’t qualified and the ability to combine inherited Roth IRAs with beneficiary Roth IRAs, are explained on the IRS website.

Steps to withdraw money from your Roth IRA

If you’ve had a Roth IRA for more than five years and are over the age of 59 1/2, you can withdraw as much or as little money from the account as you wish, whenever you wish. These qualified withdrawals don’t have to be reported to the IRS, aren’t considered income and are income-tax free. They’re also free from the capital gains taxes that might apply when stocks, bonds, mutual funds or other assets held in non-qualified accounts are sold.

How to avoid penalties on early Roth IRA withdrawals

Follow two “don’ts,” and you’ll avoid penalties on early Roth IRA withdrawals. First, don’t withdraw any money from a Roth IRA until you are older than age 59 1/2. Second, don’t take any withdrawals of earnings for five years after opening a Roth IRA. Those “years” are tax years, meaning that if you started your Roth IRA in February 2024 for the 2023 tax year, you won’t be able to make a penalty-free withdrawal until January 1, 2028.

Roth IRA and estate planning

A major part of estate planning is figuring out what happens to your assets, including IRA accounts, after your death. If you own a Roth IRA and haven’t named a beneficiary, your Roth IRA will go to your estate or to your spouse when you die. If you have named a beneficiary, he or she will inherit the Roth IRA. According to the IRS, Roth and traditional IRAs generally share the same requirements when it comes to RMDs. You won’t pay taxes on withdrawals of contributions from inherited Roth accounts, and withdrawals of earnings are mostly tax-free as well. But as noted, withdrawals of earnings made before the Roth account has been open for at least five years may be taxable. The IRS has detailed rules about inherited IRAs based on when the IRA owner died and whether the beneficiary is a spouse, non-spouse or meets other criteria.