Roth IRA Distributions — Individual Retirement Accounts

Qualified (Tax-Free) Distributions

The key advantage of a Roth IRA is that withdrawals from the account are tax-free. To qualify for tax-free status, a distribution must satisfy a five-year holding period and also meet one of four additional requirements. To be tax-free, the distribution must be made:

After age 59½
To a beneficiary upon the individual’s death
Due to disability
To pay for “qualified first-time homebuyer expenses” (up to a $10,000 lifetime limit)

This list determines whether a withdrawal is tax-free — it serves a different purpose than the similar list of exceptions to the 10% penalty on premature withdrawals from traditional IRAs.

Five-Year Holding Period

Tax-free distributions are permitted only if the contributions have remained in the Roth IRA for five “tax years.” Since contributions may actually be made up to April 15th of the following calendar year, the five-year holding period may not actually be five full calendar years.

Example: Margo Healey, age 56, makes a contribution to her Roth IRA on April 14, 2026, designating it for tax year 2025. Her holding period begins running in 2025 (the tax year of the contribution), not 2026 when the contribution was actually made. The five-year holding period ends on December 31, 2029. Distributions prior to December 31, 2029 will not qualify for tax-free status.

Assume Margo contributes $7,500 to her Roth IRA each year for the next nine years. In 2034, at age 65, she withdraws the entire amount from the account. The account value is $125,000 ($67,500 of contributions plus $57,500 of accumulated earnings). She may take the distribution tax-free: she satisfies the 5-year holding period and is over age 59½.

Nonqualified Distributions

If an individual withdraws funds from a Roth IRA without satisfying the holding period and other conditions, the distribution is “nonqualified,” meaning the earnings portion of the withdrawal is taxable. Contributions were made with after-tax dollars, so a return of contributions is always tax-free.

The tax code treats nonqualified Roth distributions as being made from contributions first, then earnings — analogous to FIFO (“first-in, first-out”) accounting. Thus, no portion of a distribution is treated as taxable earnings until total distributions from the Roth IRA exceed total contributions.

Example — Nonqualified Roth Withdrawal: Using the facts above, by 2029 Margo’s account has grown to $24,000 ($16,000 in contributions and $8,000 in accumulated earnings). She takes a distribution of $18,000 to pay emergency medical bills. Since the five-year holding period has not elapsed, the distribution is “nonqualified.”

The first $16,000 withdrawn is a return of contributions — not taxable. The remaining $2,000 is taxed as ordinary income.

Roth vs. Nondeductible Traditional IRA: Nonqualified distributions from Roth IRAs and nondeductible traditional IRAs are treated differently, even though both are funded with after-tax dollars. Roth IRAs use FIFO — tax-free contributions come out first, then taxable earnings. In a traditional nondeductible IRA, each distribution is partially taxable earnings and partially tax-free return of principal (pro-rata). For a person choosing between partial withdrawals from a Roth IRA vs. a nondeductible traditional IRA, this difference can be important.

Comparison — Nondeductible Traditional IRA: If Margo had contributed to a traditional nondeductible IRA instead, her $18,000 withdrawal would be taxed differently. The tax-free portion would have been only $12,000, leaving $6,000 taxable — compared to only $2,000 taxable under the Roth rules.

Tax-free portion = ($16,000 contributions ÷ $24,000 total value) × $18,000 withdrawal = $12,000 tax-free; $6,000 taxable.

No 10% Penalty on Premature Distributions

While the earnings portion of a nonqualified Roth distribution will be taxed, these distributions are not subject to the 10% premature distribution penalty that applies to traditional IRA withdrawals. The first withdrawals — up to the total contributions to the Roth IRA — are tax-free at any age. As a result, younger persons may “tap into” a Roth IRA much more easily than a traditional IRA. After age 59½ (and after the five-year holding period), even withdrawals of earnings are tax-free.

Example: Fred Thompson, age 58, needs money for upcoming tuition payments. He has accumulated $50,000 in his Roth IRA ($20,000 in contributions and $30,000 in earnings). Fred could withdraw up to $20,000 (the amount of his contributions) completely tax-free this year, even though he has not yet reached age 59½. Next year, with careful timing past his 59½ birthday and satisfaction of the five-year holding period, he could withdraw the remainder without tax. None of these withdrawals would be subject to a penalty tax.

Exception: If a traditional IRA is converted into a Roth IRA, the 10% penalty on premature distributions continues to apply to the converted funds for a 5-year period following the conversion. (See Roth Rollovers & Conversions →)

No Required Minimum Distributions

A major difference between traditional IRAs and Roth IRAs is that Roth IRAs do not require distributions during the owner’s lifetime. There is no RMD age for a Roth IRA owner — individuals may contribute at any age and are never required to withdraw funds. Indeed, money may remain in a Roth IRA indefinitely, continuing to grow tax-free.

This is a significant advantage for those who wish to accumulate assets to pass on to beneficiaries. However, note that inherited Roth IRAs are subject to the SECURE Act’s 10-year rule for most non-spouse beneficiaries — though distributions from an inherited Roth IRA remain tax-free as long as the original owner’s 5-year holding period was satisfied.

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