The ordering rules for Roth IRA distributions force every withdrawal to come out in a fixed sequence: your regular contributions first, then your conversion and rollover amounts, and finally your earnings. You don’t choose which layer to draw from. The sequence is built to protect you, because the money you already paid tax on sits at the front of the line and the money that could be taxed sits at the back.
That structure decides four things for every dollar you pull out: whether you owe income tax, whether you owe the 10% early withdrawal penalty, whether you owe both, or whether you owe neither. Once you know which layer a distribution is coming from, the tax answer follows.
The Three Layers Inside a Roth IRA
Every dollar in a Roth IRA belongs to one of three pools, and each pool carries its own tax treatment.
Regular contributions are the after-tax dollars you deposited directly. For 2026, the annual limit is $7,500, or $8,600 if you’re 50 or older.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026; IRA Limit Increases to $7,500 You already paid income tax on this money, so withdrawals from this pool are always free of income tax and the 10% penalty, regardless of your age or how long the account has been open.
Conversion and rollover amounts are funds moved into the Roth IRA from a traditional IRA, 401(k), or similar pre-tax account. You paid income tax on the taxable portion in the year of conversion, so the principal itself won’t be taxed again. Each conversion carries its own five-year clock for penalty purposes, though, and that clock is where most of the confusion lives.
Earnings are the investment gains the account has generated. This is the only pool that can face income tax and the 10% penalty. Earnings sit at the back of the line, so you have to exhaust both contributions and conversions before a distribution reaches them.2eCFR. 26 CFR 1.408A-6 – Distributions
How the Sequence Actually Runs
Treat it like a stack. Any distribution empties the top layer before touching the next one.
The first dollars out are your regular contributions. Every penny is tax-free and penalty-free. If you’ve put in $60,000 over the years and withdraw $45,000, the entire withdrawal is a return of contributions.3Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs Nothing about the account’s age or your own age changes that.
Once you’ve withdrawn every dollar of regular contributions, the next dollars come from conversion and rollover amounts. The principal is free of income tax. Penalty treatment depends on the five-year conversion rule, covered below.
Only after contributions and conversions are both exhausted does a withdrawal reach earnings. If the distribution isn’t qualified at that point, the earnings portion is added to your taxable income and may also face the 10% penalty.2eCFR. 26 CFR 1.408A-6 – Distributions For most account holders, the contribution and conversion layers create a substantial tax-free buffer before anything taxable is touched.
Rules Inside the Conversion Layer
The conversion layer has two internal sequencing rules and a penalty clock.
Oldest Conversion Comes Out First
If you’ve done multiple conversions, the IRS uses first-in, first-out.3Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs Say you converted $30,000 in 2019, $20,000 in 2022, and $25,000 in 2024. When a distribution reaches the conversion layer, the 2019 conversion is deemed withdrawn first, then 2022, then 2024. This ordering matters because each conversion carries its own separate five-year penalty clock.
Taxable Portion Before Non-Taxable Basis
Within a single conversion, the amount that was included in your gross income at conversion comes out before any non-taxable basis. If you converted $50,000 and $40,000 was taxable while $10,000 was basis from nondeductible traditional IRA contributions, the first $40,000 withdrawn from that conversion is the taxable portion.2eCFR. 26 CFR 1.408A-6 – Distributions This sub-ordering matters for the five-year penalty rule, since only the taxable portion can trigger it.
The Five-Year Conversion Clock
Each conversion starts a five-year clock on January 1 of the tax year of the conversion. Withdraw the taxable portion before that clock expires and the IRS applies the 10% early withdrawal penalty as if the amount were includible in your gross income.3Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs Without this rule, someone could convert on Monday and withdraw on Tuesday, sidestepping the penalty that would have applied to a direct traditional IRA distribution.
A conversion done in March 2023 starts its clock on January 1, 2023 and finishes on January 1, 2028. Withdraw $10,000 of that conversion’s taxable portion in 2026 and you’d owe a $1,000 penalty, even though no income tax is due on the withdrawal itself.
Here is the part that gets missed. The conversion penalty only applies if you’d otherwise owe the 10% early withdrawal penalty. If you’re already 59½, you’re exempt from the early withdrawal penalty under the general rules, and the conversion clock becomes irrelevant. The same is true for distributions due to disability, death, or any other recognized exception to the 10% penalty. The five-year conversion rule doesn’t create a new penalty. It only prevents conversions from being used to dodge an existing one.
The non-taxable portion of a conversion, the basis from nondeductible traditional IRA contributions, is never subject to this penalty, no matter when it’s withdrawn.3Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
When the Ordering Rules Stop Mattering
A qualified distribution makes the ordering irrelevant. All three pools come out completely free of income tax and the 10% penalty. Two conditions have to be met together.
The first is the five-year account rule. Your first contribution to any Roth IRA (including a conversion or rollover) must have been made at least five tax years ago. If you opened your first Roth IRA with a 2021 contribution, the five-year period runs from January 1, 2021 through December 31, 2025, and you satisfy the rule on January 1, 2026. It’s a one-time hurdle. Once cleared, it’s cleared for every Roth IRA you own.3Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
The second condition requires one of these triggering events:
- Reaching age 59½.
- Disability, as defined by the IRS.
- Death, with distributions to a beneficiary or the estate.
- First-time home purchase, up to $10,000 in lifetime withdrawals for qualifying acquisition costs.
Meet both conditions and every dollar withdrawn is tax-free and penalty-free, earnings included. Miss either one and the distribution is non-qualified, at which point the ordering rules take over and start protecting you by placing the tax-free layers at the front of the line.4Internal Revenue Service. Instructions for Form 8606 (2025)
Exceptions That Override the Penalty
When a non-qualified distribution reaches the earnings layer, the earnings are added to your taxable income. The 10% penalty is a separate charge on top. Several exceptions can eliminate the penalty while leaving the income tax intact.
Long-standing exceptions include unreimbursed medical expenses exceeding 7.5% of adjusted gross income, health insurance premiums paid while unemployed, and qualified higher education expenses.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Substantially equal periodic payments (72(t) payments) and distributions for birth or adoption expenses also qualify.
Starting in 2024, SECURE Act 2.0 added an emergency personal expense exception: one distribution per calendar year of up to $1,000 (or the vested balance above $1,000, if lower) for unforeseeable personal or family emergencies. The withdrawn amount can be repaid within three years to avoid counting it as income.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
These exceptions waive only the penalty. Income tax on non-qualified earnings still applies. For the conversion layer, the same exceptions override the five-year conversion penalty, because that penalty runs through the same early withdrawal mechanism.
Tracking Your Own Basis
The IRS doesn’t track your Roth IRA basis for you. Your brokerage reports total distributions on Form 1099-R, but it doesn’t know which layer those dollars came from. That work falls to you, and the tool is IRS Form 8606.
Part III of Form 8606 is where you calculate the taxable portion of any Roth IRA distribution. You report your total regular contributions on one line and your total conversion amounts on another, then walk through the ordering sequence to determine how much of the distribution, if any, reaches the taxable earnings layer.4Internal Revenue Service. Instructions for Form 8606 (2025) The same form is used to report conversions from traditional IRAs to Roth IRAs.6Internal Revenue Service. About Form 8606 – Nondeductible IRAs
If a distribution is qualified, Form 8606 generally isn’t required for that year’s Roth withdrawal. Keep your own running tally anyway. The IRS can ask you to substantiate your basis years later, and reconstructing a decade of contribution history from old returns is painful. A simple spreadsheet tracking each year’s contributions, each conversion amount and date, and the taxable-versus-basis split of each conversion is enough.