Inherit a Father’s $250,000 Roth IRA and Empty It the First Year to Keep Things Simple, and About $150,000 of Tax-Free Growth Never Happens. The Ten-Year Rule Is a Deadline, Not a Reason to Hurry

Let’s say an adult child inherits a $250,000 Roth IRA from their father. They have two choices: take the full balance out in the first year, or leave it invested until the deadline under the 10-year rule. To compare the two, we’ll rely on IRS Publication 590-B, the Internal Revenue Code, and a simple growth assumption.

How the Ten-Year Rule Applies to an Adult Child

Under the SECURE Act, most nonspouse beneficiaries must take the full balance of an inherited IRA by the end of the 10th year after the owner’s death, according to Vanguard. The rule covers owners who died on or after January 1, 2020.

IRS Publication 590-B sets the deadline at the end of the year that contains the 10th anniversary of the death. If the owner died in 2025, the account must be emptied by December 31, 2035.

Most adult children do not qualify as what the IRS calls eligible designated beneficiaries. IRS Publication 575 limits that group to the spouse, a child who has not reached majority, a disabled individual, a chronically ill individual, or an individual not more than 10 years younger than the person who died. People in those categories can take payments for life. Most adult children who inherit from a parent are on the 10-year timeline.

Why an Inherited Roth Usually Has No Annual Minimum

Publication 590-B says that when the owner dies before the required beginning date, and the 10-year rule applies, “no distribution is required for any year before the 10th year.” Vanguard notes that beneficiaries may owe withdrawals in years 1 through 9 when the decedent had already begun taking RMDs. Roth IRA owners do not take required minimum distributions during their lifetimes. As a result, a Roth beneficiary on the 10-year rule generally has no yearly withdrawal requirement before the final year.

Taxes on the withdrawals depend on whether they count as qualified distributions. A distribution made to a beneficiary (or to the estate of the individual) on or after the death of the individual can be a qualified distribution under 26 U.S.C. § 408A(d)(2)(A)(ii), and § 408A(d)(1) excludes qualified distributions from gross income.

A 5-taxable-year period still applies under § 408A(d)(2)(B). That timeline starts with the first year the owner contributed to any Roth IRA. Fidelity describes inherited Roth withdrawals as tax-free as long as the original owner met that requirement.

What $250,000 Could Grow to in Ten Years

This comparison uses a 5% annual return compounded for 10 years. On that assumption, $250,000 grows to about $407,224. That is roughly $157,224 of growth. If you meet the five-year requirement, you can take that growth tax-free in the final year. A full withdrawal in the first year ends the account, so none of that growth builds up inside the Roth.

Different return assumptions produce different results. The figures below show the balance after 10 years and the growth included in it:

• At 4% a year: about $370,061, including $120,061 of growth
• At 5% a year: about $407,224, including $157,224 of growth
• At 6% a year: about $447,712, including $197,712 of growth

Much of the growth comes late. At 5%, the account would hold about $319,070 after five years, so roughly $88,153 of the gain arrives in the second half.

Actual returns can vary from year to year, and a market decline could leave the balance below $250,000 at any point during the decade; these projections assume steady growth every year.

Where the Money Ends Up After a First-Year Withdrawal

A qualified withdrawal carries no income tax. Schwab also notes that inherited IRA beneficiaries will not incur the 10% early withdrawal penalty. The cost of an early withdrawal appears later, as money moved into a taxable brokerage or savings account earns interest, dividends, and capital gains that are taxed each year. Inside the inherited Roth, the same earnings build up without annual tax. Schwab describes the undistributed assets as able to keep growing tax-free for up to ten years.

Beneficiaries take money out early for different reasons, including paying off debt, building an emergency fund, or closing an extra account. The comparison above measures only the tax-free growth forgone. It does not account for interest saved on paid-off debt or personal circumstances, which vary from household to household.

Penalties and Deadlines in the Final Year

Missing the deadline triggers a penalty under Publication 590-B, which states that any amount remaining in the account after December 31 of the year containing the 10th anniversary is subject to the excise tax detailed in Excess Accumulations.

Fidelity’s inherited IRA guidance sets the penalty for missed required withdrawals at 25%. That is one of several IRS rules that can quietly drain an inherited account, and we mapped nine of them in a free tax trap guide. Publication 590-B also suggests reviewing the plan documents or contacting the IRA custodian, since some accounts have their own provisions for the 5-year or 10-year rule.

Treasury’s final regulations under section 401(a)(9) were published on July 19, 2024, and apply to calendar years beginning on or after January 1, 2025. For a beneficiary deciding when to take distributions, the key details are the owner’s year of death, which sets the deadline; the start of the owner’s five-year Roth timeline; and how the account is invested during the remaining years.

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