Inherit a $150,000 Roth Your Mother Opened Three Years Ago and the Growth Isn’t Tax-Free Yet, Even for You. Her Five-Year Clock Becomes Yours, and Two More Years Have to Pass First

Picture an adult child who inherits a $150,000 Roth IRA that their mother opened just three years before she died. Roth IRAs are often called tax-free, but federal law ties that treatment to a five-year holding period. For heirs, that clock starts with the original owner’s first contribution, so the beneficiary doesn’t get a fresh five years.

How the Five-Year Clock Carries Over to Heirs

Under the Internal Revenue Code, any qualified distribution from this type of account “shall not be includible in gross income” under 26 U.S.C. § 408A(d)(1). One listed way a payout qualifies is when it is “made to a beneficiary (or to the estate of the individual) on or after the death of the individual”. Read alone, that language would seem to cover every heir.

A separate provision, Section 408A(d)(2)(B), limits it. A payout is not treated as qualified if it is made “within the 5-taxable year period beginning with the first taxable year for which the individual made a contribution to a Roth IRA.” In that sentence, “the individual” refers to the account owner. IRS Publication 17 states the same test from the owner’s side: a qualified distribution must be “made after the 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for your benefit”.

In the main example, say the mother’s first contribution counted for tax year 2023. Three tax years of her five-year window have already passed, and the current year and next year remain. Her death does not stop or restart the count. The heir simply takes over the remaining time.

Which Part of $150,000 Is Actually Exposed to Tax

Only part of the account balance is affected by the five-year timing. The ordering rules in Section 408A(d)(4)(B) treat withdrawals as coming “from contributions to the extent that the amount of such distribution, when added to all previous distributions from the Roth IRA, does not exceed the aggregate contributions”. Regular contributions come out first. Converted amounts come out first, followed by earnings.

So whatever share of the $150,000 the mother put in herself can be withdrawn tax-free. Only the growth is at issue. According to IRS Publication 590-B, a nonqualified payout to a beneficiary is “generally includible in the beneficiary’s gross income in the same manner as it would have been included in the owner’s income had it been distributed to the IRA owner when they were alive”.

IRS Publication 590-B includes an example about an account holder named Ms. Hibbard. When Ms. Hibbard died in 2024, her Roth IRA held regular contributions of $4,000, a conversion contribution of $10,000, and earnings of $2,000. She had named her children as equal beneficiaries.

Each child took an immediate distribution of $4,000, which was split proportionally across the three layers. Because the payouts came before the five-year period ended, “each beneficiary includes $500 in income for 2024”. That $500 was each child’s share of the earnings. The contribution and conversion dollars came out tax-free.

No Penalty, but a Firm Deadline

Beneficiaries also avoid the early withdrawal penalty. The 10% additional tax does not apply to distributions “made to a beneficiary (or to the estate of the employee) on or after the death of the employee” under 26 U.S.C. § 72(t)(2)(A)(ii). An early withdrawal therefore costs ordinary income tax on the earnings portion and nothing more.

The time limit comes from the required distribution rules. For designated beneficiaries, Section 401(a)(9)(H)(i) replaces the five-year payout window with one substituting “10 years” for “5 years”. Publication 590-B’s example says an heir of an owner who died in 2024 must empty the account by the end of 2034. Eligible designated beneficiaries, including surviving spouses, can instead take payments based on life expectancy.

Non-individual beneficiaries, such as an estate, have less time. They must withdraw the full balance by December 31 of the year containing the fifth anniversary of the owner’s death. Roth owners themselves are never subject to the lifetime required distribution rule under Section 401(a)(9)(A), so the mother would not have taken any required withdrawals before she died.

How the Two Clocks Line Up for a Beneficiary

In the main scenario, two timelines overlap. The mother’s five-year timer has about two tax years left. The heir’s 10-year payout window is longer. A beneficiary who leaves the earnings in the account until the five-year timer runs out could then withdraw the rest as qualified distributions and still meet the 10-year deadline. You can withdraw contribution dollars tax-free at any time.

Waiting also has drawbacks, since the account’s value can fall while it sits invested, and taking large withdrawals all at once near the deadline could make cash planning harder.

A few facts decide the result: the tax year the mother first contributed, whether any of the money came from conversions, and which beneficiary category the heir falls into. The account custodian’s records and the mother’s past tax returns usually contain that information (we include a full checklist of beneficiary forms, ownership, and the paperwork heirs actually need in a free estate guide here).

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