Inherit a Roth IRA Your Father Opened Three Years Ago and the Earnings Aren’t Tax-Free Yet. The Five-Year Clock Doesn’t Restart for Heirs, but It Doesn’t Stop Either, and Year 10 Is Still the Deadline
A daughter inherited her father's Roth IRA, assumed the tax-free label meant exactly that, and pulled out the full balance to pay down her mortgage. What she did not know about her father's five-year clock cost her more than she…
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In March 2026, a 51-year-old daughter inherited her father’s Roth IRA. He had opened it in 2023 by converting $200,000 from a traditional IRA. The custodian renamed it as an inherited Roth, at which point the account was worth $240,000.
She had always heard that Roth money comes out tax-free. In the fall she withdrew the whole balance to pay down her mortgage. Then her CPA told her that $40,000 of it counts as taxable income on her 2026 return.
The Roth label was accurate. The timing was wrong. Her father’s account had not yet aged five years, and she took the earnings out a little more than a year too early.
Father’s Five-Year Clock Keeps Running After His Death
A Roth distribution has to pass two tests to be tax-free. The first test is the event. Under 26 U.S.C. § 408A(d)(2)(A)(ii), a payment made to a beneficiary after the owner dies meets it automatically.
The second test is time. Section 408A(d)(2)(B) bars qualified status to any distribution made within the 5-taxable-year period that begins with the first year the owner contributed to a Roth IRA.
Treasury regulation 26 CFR 1.408A-6, A-2 starts that timer on January 1 of the year of the owner’s first regular contribution or first conversion. Under A-7(a), the timer is not reset when the owner dies, and the time the heir holds the account counts on top of the time the father held it. Under A-7(b), the timer on the Roth she inherited runs separately from her own Roth IRAs, so her own decade-old Roth gives her no head start.
Her father’s first Roth money went in during 2023. That means his period ran from January 1, 2023, through December 31, 2027. Any earnings paid out before January 1, 2028, are taxable.
Running the Numbers on a $240,000 Inheritance
Roth withdrawals follow a fixed order. Under A-8, money comes out of regular contributions first, then conversions on a first-in, first-out basis, and earnings last. Under A-4, a nonqualified distribution is taxable only to the extent it exceeds total contributions.
Her father’s $200,000 conversion therefore came back to her tax-free. The remaining $40,000 of earnings is ordinary income. A nonqualified distribution to a beneficiary is taxed in the same manner as it would have been included in the owner’s income if he had taken it himself.
She owes no 10% early-withdrawal penalty. Section 72(t)(2)(A)(ii) exempts distributions made to a beneficiary after the owner’s death, and that exemption also covers converted money still inside its own five-year window.
She files single, and her salary already puts her in the 24% bracket, which IRS tables place between $103,351 and $197,300 of taxable income for single filers. If all of the earnings fall inside that bracket, the federal bill is $9,600, before any state income tax.
Waiting Until 2028 Erases the $9,600 Bill
She could have withdrawn the full $200,000 of conversion money in 2026 for the mortgage and owed nothing. Had she left the $40,000 of earnings in the account she inherited until January 2028, those earnings would have come out as a qualified distribution, free of federal tax. The wait alone was worth $9,600.
The better move was to leave the whole account invested. Roth IRAs are treated as though the Roth IRA owner died before his or her required beginning date, so an adult child who is not an eligible designated beneficiary has no annual required minimum distributions. She gets one deadline. Section 401(a)(9)(H)(i) extends the old five-year payout window to 10 years, and the account has to be empty by the end of the 10th calendar year after the year of the owner’s death. With a 2026 death, that is December 31, 2036.
Every year from 2028 through that deadline is fully tax-free growth. The five-year timer and the 10-year deadline run side by side, and the second one does not wait for the first.
Steps to Take Before Touching an Inherited Roth
- Find the start year. Check with the custodian for the year of the decedent’s first Roth contribution or conversion, then verify it against his Form 5498 statements and the Form 8606 he filed for any conversion year.
- Total the basis. Add up every contribution and conversion. That amount can come out tax-free at any time, before or after the five-year mark.
- Hold the earnings. Leave anything above basis in the account until January 1 of the sixth year after the first contribution.
- Mark the deadline. Put December 31 of the 10th year after death on the calendar, and plan the final withdrawal well ahead of it.
- Check spousal status. A surviving spouse who treats the account as her own follows separate rules under A-3 and A-7(b).
A CPA or estate attorney can confirm these dates against your family’s own records before any money moves. The inherited Roth five-year trap is one of several tax provisions that can cost retirement accounts six figures, and we mapped the rest in a free report.
The key figure is $9,600. The figure represents the federal tax an heir pays for taking out $40,000 of Roth earnings out before the father’s five-year timer runs out. A calendar and a little patience would have avoided all of it.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
