Inherited Roth IRA By Non-Spouse Beneficiary - 5-Year Clock Issues?
Understanding the 5-Year Rule for Inherited Roth IRAs
The Roth IRA 5-year clock can be confusing, especially when dealing with inherited accounts. For original Roth IRA owners, the general rule is straightforward: earnings become tax-free once the account has been held for five years and the owner is at least 59½. When both conditions are met, distributions are fully qualified—meaning no taxes and no penalties. But when a non-spouse inherits a Roth IRA from someone who didn't meet these criteria, things get more complicated.
How the 5-Year Clock Affects Non-Spouse Beneficiaries
Let’s consider a case where the original Roth IRA owner was not qualified at the time of death. That is, they were either under age 59½ or had not held any Roth IRA for at least five years. If a non-spouse inherits this Roth IRA, they must follow the original owner's 5-year clock—even if the beneficiary has their own long-standing Roth IRA.
For example, if someone converted their traditional IRA to a Roth IRA but passed away two years later, the beneficiary cannot simply claim full tax-free access to all funds. The clock that started when the conversion was made continues, and the beneficiary inherits that timing along with the account. The beneficiary's personal Roth IRA history does not shorten or eliminate that waiting period.
Ordering Rules Make Roth IRA Distributions Beneficiary-Friendly
Fortunately, Roth IRA distribution ordering rules provide a safeguard. These rules determine how withdrawals are classified for tax purposes. First, contributions come out. Then come conversion amounts. Finally, earnings are distributed last. This sequence also applies to inherited Roth IRAs.
If a beneficiary inherits a Roth IRA that includes both contributions and converted funds, those amounts become available for tax-free distribution immediately—even if the 5-year clock is still running. The earnings portion remains locked until the clock completes five full years from the original conversion date.
This means the beneficiary can access all contributions and converted dollars first, penalty-free and tax-free, before touching any earnings. Once the original 5-year clock completes, the earnings also become fully tax-free.
Case Example: John’s Roth IRA and Maggie’s Inheritance
John, age 50, converts a $100,000 traditional IRA to a Roth IRA in 2024. He also contributes $8,000 each in 2024 and 2025, using catch-up provisions. By late 2025, the account has grown to $136,000, which includes $20,000 in earnings.
John passes away in 2025, leaving the account to his friend Maggie. In 2026, Maggie sets up an inherited Roth IRA with these funds. She already owns a Roth IRA that she opened 10 years earlier, but that account has no effect on the clock for John’s converted IRA. Maggie must follow John’s original 5-year clock, which started on January 1, 2024, and ends January 1, 2029.
Even though Maggie is now the account holder, she must wait until January 1, 2029, for the $20,000 in earnings to become tax-free. Until then, she may withdraw the $16,000 in contributions and the $100,000 in converted dollars without any tax or penalty, thanks to the ordering rules.
Frequently Asked Questions
What is the 5-year clock in a Roth IRA?
The 5-year clock determines when earnings in a Roth IRA become tax-free. It begins on January 1 of the year of the first contribution or conversion.
Does the clock reset for inherited Roth IRAs?
No. A non-spouse beneficiary must follow the deceased original owner's 5-year timeline. Personal Roth IRA history does not transfer to the inherited account.
What if the original owner met the 5-year requirement?
If the original Roth IRA owner met the 5-year requirement before passing, all funds—including earnings—are immediately tax-free to the beneficiary.
How are distributions from an inherited Roth IRA taxed?
Withdrawals are tax-free until earnings are accessed. Contributions and conversions are distributed first under IRS ordering rules, and those are tax-free.
Can a non-spouse beneficiary contribute to an inherited Roth IRA?
No. Inherited IRAs cannot receive new contributions. They are separate from the beneficiary’s personal IRA accounts.
Plan With Confidence
Inheriting a Roth IRA involves more than just accepting assets—it requires understanding timing rules.
Schedule a complimentary consultation with a licensed advisor to make sure your distributions stay tax-efficient.
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.
