Rules for Withdrawing From an Inherited Roth IRA

Inheriting a Roth IRA can feel like a financial blessing wrapped in a bit of confusion. On one hand, you’ve gained a valuable asset, but on the other, you’ve got a new set of rules to follow—and they’re not always straightforward. Don’t worry, though! We’re here to break it all down so you can make the most of this opportunity without any headaches (or tax penalties).

What is an Inherited Roth IRA?


A Roth IRA is a retirement account funded with after-tax dollars, meaning qualified withdrawals are tax-free. When you inherit a Roth IRA, the account is transferred into your name as the beneficiary. This is where things get specific: the rules for withdrawal vary based on your relationship to the original account holder, your age, and the account holder's age at the time of their passing.

Types of Inherited IRAs


There are two primary types of inherited IRAs:

1) Inherited Roth IRA:
  • Withdrawals are generally tax-free if certain conditions are met.
  • Rules differ based on the beneficiary’s relationship to the original account holder and the timing of the account owner’s death.

2) Inherited Traditional IRA:
  • Withdrawals are typically subject to income tax.
  • Rules governing required minimum distributions (RMDs) and taxation are distinct from those for inherited Roth IRAs.

Key Rules for Withdrawing From an Inherited Roth IRA


1. Follow the 10-Year Rule (for Most Beneficiaries):
Under the SECURE Act of 2019, most non-spouse beneficiaries are required to empty the inherited Roth IRA within 10 years of the original owner's death. The good news? You aren’t required to take annual distributions—giving you flexibility to withdraw as needed over the decade.

Example: If you inherit a Roth IRA in 2024, you’ll need to withdraw all funds by the end of 2034.

2. Required Minimum Distributions (RMDs) for Certain Beneficiaries:
Some beneficiaries are exempt from the 10-year rule and can stretch distributions over their lifetime using the IRS life expectancy tables. This applies to:
  • Spouses
  • Minor children of the account holder (until they reach the age of majority)
  • Disabled or chronically ill individuals
  • Beneficiaries not more than 10 years younger than the account holder
RMD rules for inherited Roth IRAs depend on the following:
  • The account holder’s date of death (before or after the required beginning date).
  • The beneficiary’s relationship to the account holder.
  • Changes implemented by the SECURE Act (2019).

3. Tax-Free Withdrawals:
One of the best perks of an inherited Roth IRA is that qualified withdrawals are tax-free. To qualify:
  • The Roth IRA must have been open for at least five years before the original owner’s death.
  • If the five-year rule isn’t met, earnings may be subject to taxes but not penalties.

4. Spousal Beneficiaries Have More Options:
If you’re a spouse inheriting a Roth IRA, you have additional choices:
  • Treat it as your own Roth IRA: Roll the inherited account into your Roth IRA and follow regular Roth IRA rules.
  • Leave it as an inherited Roth IRA: Follow the 10-year rule or take RMDs based on your life expectancy.

5. Lump-Sum Distributions:
Beneficiaries can choose to withdraw the entire balance in a lump sum. While Roth IRA distributions are usually tax-free, taking a large withdrawal might not always be the best financial decision. Lump-sum withdrawals could reduce the potential for tax-free growth.

6. No Additional Contributions:
Inherited Roth IRAs are not like personal retirement accounts; you cannot make additional contributions. The account serves solely as a beneficiary vehicle.

7. Withdrawal Timing:
You must begin taking distributions by December 31 of the year following the original owner’s death unless you are the spouse and choose to treat the account as your own. Missing this deadline can trigger penalties.

8. Special Rules for Spouses:
Spouses have unique options when inheriting a Roth IRA:
  • Treat the inherited Roth IRA as their own, rolling it into their personal Roth IRA.
  • Defer distributions until the deceased spouse would have turned 72.
  • Follow the 10-year rule, requiring the account to be emptied within ten years of the original owner’s death.
  • These rules allow spouses greater flexibility compared to other beneficiaries.

9. The Five-Year Rule:
For non-spouse beneficiaries, the five-year rule may apply under certain conditions:
  • If the original owner died before their required beginning date, the account must be fully withdrawn within five years.
  • No withdrawals are required until the fifth year, but the account must be depleted by then.
Note: The year 2020 does not count toward the five years due to special provisions during the pandemic.

How to Strategize Withdrawals?


The 10-year rule gives flexibility, but that freedom comes with responsibility. To make the most of your inherited Roth IRA:
  • Plan withdrawals around your tax bracket: While Roth withdrawals are tax-free, large distributions could impact other income-related benefits like healthcare subsidies.
  • Consider growth potential: Roth IRAs grow tax-free, so leaving funds in the account as long as possible may maximize your inheritance.
  • Evaluate Financial Needs: Withdraw funds based on immediate needs while considering long-term growth. Inherited Roth IRAs offer the advantage of tax-free growth, so avoid depleting the account unnecessarily.
  • Maintain Detailed Records: Keep thorough documentation of withdrawals and any taxes paid. This will help avoid errors and make tax filing easier.
  • Seek professional advice: A financial advisor or tax professional can help tailor a strategy to your situation.

Common Mistakes to Avoid


  • Ignoring the 10-year deadline: Failing to empty the account by the deadline could result in hefty penalties.
  • Confusing rules for spousal and non-spousal beneficiaries: Each category has unique rules, so ensure you understand your role.
  • Overlooking the five-year rule: If the account is relatively new, double-check its eligibility for tax-free earnings withdrawals.
  • Missing RMD Deadlines: Penalties for missing RMDs can be as high as 25%. Stay proactive by setting reminders and consulting professionals.
  • Misunderstanding Tax Rules: Withdrawals might be taxable under certain conditions. Seek expert advice to avoid surprises.
  • Overlooking Long-Term Growth Potential: Maximize the tax-free growth of a Roth IRA by withdrawing funds only when necessary.
  • Failing to Stay Updated on Tax Laws: Legislation like the SECURE Act can change rules significantly. Regularly review updates or consult with a tax advisor.

Final Thoughts:
Inherited Roth IRAs can provide significant financial benefits, but navigating the rules is essential to avoid costly mistakes. Whether you’re a spouse, child, or other beneficiary, understanding your responsibilities will help you make informed decisions and optimize your inheritance. If you’re unsure where to start, consult a financial advisor to ensure you stay compliant while making the most of your inherited Roth IRA.