Are Roth IRA Distributions Taxable in California?

Qualified distributions from a Roth IRA are not taxable in California. The state conforms to federal treatment, so if your withdrawal meets both the five-year holding rule and a qualifying event, it comes out free of California income tax just as it does federally.¹ Non-qualified withdrawals are a different story. Some are still fully tax-free because of how the IRS orders your money coming out; others trigger ordinary income tax plus a 2.5% California penalty on top of the federal 10%.

When a Roth Distribution Counts as Qualified

Two conditions have to be satisfied. Meeting only one is not enough.²

First, the five-year holding period. The clock starts on January 1 of the tax year for which you made your first-ever Roth IRA contribution, and once satisfied it never resets, even if you later open other Roth accounts.³

Second, a qualifying event. The distribution has to be made after you reach age 59½, after your death (to a beneficiary or your estate), because you are totally and permanently disabled, or for a first-time home purchase up to a $10,000 lifetime limit.²

Clear both hurdles and the entire withdrawal is tax-free and penalty-free at the federal and California levels. Your federal return shows no taxable amount, and nothing gets added back on your California Form 540. Most full-year residents need no state adjustment at all.¹

Non-Qualified Withdrawals and the Ordering Rules

Failing either hurdle makes the distribution non-qualified, but that does not automatically mean you owe tax. The IRS, and California by conformity, treats every Roth withdrawal as coming out of three pools in a fixed order:²

Regular contributions come out first. You already paid income tax on these dollars, so they are always tax-free and penalty-free.
Conversion amounts come out second. These were taxed at the time of conversion, so no income tax applies on withdrawal. If you are under 59½ and pull out converted dollars within five years of that specific conversion, the federal 10% penalty can still hit the taxable portion.
Earnings come out last. This is the only pool that can trigger both income tax and penalties on a non-qualified distribution.

If you hold multiple Roth IRAs, the IRS aggregates them as a single account for this ordering, and California follows the same approach.² You cannot route a withdrawal through one account to dodge the earnings pool in another.

The practical upshot: a lot of people take non-qualified distributions without owing anything, because they have not yet withdrawn more than their contributions and conversions. The tax only lands once you dip into growth.

The California Early Withdrawal Penalty

When a non-qualified distribution reaches the earnings pool, those earnings are taxed as ordinary income at both levels. California’s top marginal rate is 12.3%, with an additional 1% Mental Health Services Tax on taxable income above $1 million, pushing the ceiling to 13.3%.⁴

On top of income tax, if you are under 59½ and no exception applies, two early withdrawal penalties stack:

Federal: 10% additional tax on the taxable earnings.⁵
California: 2.5% additional tax on the same earnings, reported on Form FTB 3805P.⁶

Combined, that is 12.5% in penalties layered on top of your marginal rate. For a top-bracket California resident, the all-in rate on early Roth earnings can approach 25.8%.

Exceptions That Waive the California Penalty

California conforms to many, though not all, federal exceptions. The 2025 FTB 3805P instructions eliminate the 2.5% state penalty for the following:⁷

Total and permanent disability.
Distribution to a beneficiary after the owner’s death.
Unreimbursed medical expenses above the federal Schedule A threshold.
Health insurance premiums paid during unemployment (IRA distributions only).
Qualified higher education expenses (IRA distributions only).
First-time home purchase, up to $10,000 lifetime (IRA distributions only).
Distributions forced by an IRS levy on the account.
Military reservists called to active duty for at least 180 days.
Birth or adoption, up to $5,000 within one year of the event.
Terminal illness.
Qualified distributions to domestic abuse victims.
Eligible emergency distributions.
Disaster distributions, up to $22,000 for federally declared disasters.

An exception removes the 2.5% penalty, not the income tax. You still owe ordinary tax on any earnings distributed. If your situation falls outside this list, check the current FTB 3805P instructions, because some federal exceptions are not recognized by California.

The 529-to-Roth Rollover Trap

Federal law now permits rollovers from a 529 college savings plan to a Roth IRA when the 529 has been maintained for at least 15 years, and the rollover is tax-free and penalty-free federally. California does not conform.⁸ The state treats the rollover amount as taxable income and adds the 2.5% additional tax on top.⁷

Because the rollover is seamless on the federal return, this adjustment is easy to miss. Report the federally excluded amount on Schedule CA (540), Part I, Section B, line 8z, column C, and attach Form FTB 3805P for the penalty.⁸ The FTB flags this as one of the more common errors on Roth-related returns.

Inherited Roth IRAs

Distribution to a beneficiary counts as a qualifying event, so the only remaining question for an inherited Roth is whether the five-year holding period was satisfied. If the original owner’s account had already cleared five years, beneficiary withdrawals are fully tax-free at the federal and California levels.² If the owner died before that clock ran out, any earnings portion distributed before the period ends is taxable.

Federally, most non-spouse beneficiaries have to empty an inherited Roth within 10 years under the SECURE Act. FTB Publication 1005 states California generally does not conform to the original 2019 SECURE Act but does conform to SECURE 2.0.¹ For an inherited Roth, the conformity gap rarely changes the result, because qualified beneficiary distributions are tax-free whenever they come out.

If You Move Into or Out of California

Roth distributions are intangible income. California taxes them based on where you live when you receive the money, not where it was earned.

Move out of California and establish residency elsewhere, and distributions you take as a nonresident are not taxable by California. This applies to both qualified and non-qualified distributions received after December 31, 1995, even if every dollar of growth accumulated while you were a California resident.⁹ Your new state may tax non-qualified earnings under its own rules.

Move into California and the reverse applies. Non-qualified earnings distributed while you are a resident are subject to California tax, even if the account was built entirely in Nevada, Texas, or another no-income-tax state.

Part-year residents file Form 540NR and allocate on Schedule CA (540NR): include the taxable portion of any distribution received during your California-resident period and exclude anything received after you became a nonresident.¹⁰ If the distribution was qualified, allocation does not matter, because nothing is taxable either way.

1
Franchise Tax Board. 2024 FTB Publication 1005 Pension and Annuity Guidelines
2
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
3
Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs) – Section: Roth IRAs
4
Franchise Tax Board. 2025 California Tax Rate Schedules
5
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
6
Franchise Tax Board. Early Distributions
7
Franchise Tax Board. 2025 Instructions for Form FTB 3805P Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
8
Franchise Tax Board. 2025 Instructions for Schedule CA (540) California Adjustments
9
Franchise Tax Board. 2024 FTB Publication 1031 Guidelines for Determining Resident Status
10
Franchise Tax Board. 2024 Instructions for Schedule CA (540NR) California Adjustments – Nonresidents or Part-Year Residents