What Is an Inherited Roth IRA?

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DEFINITION

An inherited Roth IRA is a retirement account that has been bequeathed to someone after the original account owner has died.

An inherited Roth IRA is a retirement account that has been bequeathed to someone after the original account owner has died.

The contributions made to a Roth IRA are made with money that has been taxed, but the distributions made to both the original owner and the inherited owner are not taxed. The process of dealing with an inherited IRA depends on what type of beneficiary you are. 

As you’ll learn here, spouses and certain exempted beneficiaries have several options for how they receive distributions from inherited Roth IRAs. Let’s look at those options and how they work.

Definition and Example of an Inherited Roth IRA


An inherited Roth IRA is a type of retirement account left by an original owner to a beneficiary after the owner’s death. The beneficiary can be anyone, though the rules for how to handle the account differ based on the person’s relationship to the original owner. 

  • Alternate name: RA Beneficiary Distribution Account (IRA BDA)

An inherited Roth IRA is similar to a standard Roth IRA in that the contributions are made with after-tax funds, but the withdrawals and distributions are untaxed, so long as certain requirements are met.

Typically, a five-year holding period must be met before funds from an inherited IRA can be withdrawn earnings tax-free. That means the account must have been open for at least five years. 

For example, if you inherit a Roth IRA from your husband, and he opened the account more than five years ago, you can inherit his account and take distributions without an early withdrawal penalty (generally 10%) and without paying taxes on the distributions.

If it has been more than five years from the date of the original owner’s first contribution to the Roth IRA, the beneficiary has more options for how to deal with the inherited funds without taxes and penalties. 

A beneficiary who was a spouse will have more options for how to handle the account than non-spousal beneficiaries. For example, then can take a lump-sum distribution or open a new IRA account in their name.

If you are the non-spousal beneficiary of a Roth IRA, you generally must open a new Roth IRA account held in your name. You then transfer the assets of the original account to this new account. 

How an Inherited Roth IRA Works 

Inherited Roth IRAs have different rules than a Roth IRA account that you own. These rules will vary depending on the type of beneficiary you are and when the account was inherited. 

First, all the money in the account must be distributed by a certain time, five or 10 years depending on the year the account owner died.

If you inherited a Roth IRA from a deceased spouse and you are the sole beneficiary, you have the most options. You may roll the funds over into your own Roth IRA and continue growing a retirement account, which can be distributed tax-free after the age of 59½. 

Alternatively, you may also open an inherited Roth IRA in your name and take tax-free distributions at any time. You may also take the funds as one tax-free lump sum. 

Finally, spousal beneficiaries can elect the life-expectancy method. This method requires that monthly distributions are spread over the beneficiary’s life expectancy, but allows the funds can continue to grow tax-free. 

Roth IRA account owners are not usually required to take RMD, or required monthly distributions, like those of a traditional IRA. Beneficiaries of an inherited Roth IRA, however, must take RMD based on the traditional IRA’s rules. 

Non-Spousal Beneficiaries

There are two types of beneficiaries other than the spouse: 

  • Eligible designated beneficiaries, who are minor children, chronically ill, permanently disabled, or less than 10 years younger than the original account owner
  • Designated beneficiaries who do not meet any exemption requirements 

With the SECURE Act, Congress tightened the rules for those beneficiaries who inherit a Roth IRA after Dec. 31, 2019. Those parties can no longer treat the inherited Roth as their own by making continued contributions to it. Instead, they must take a lump sum or distribute the funds by the end of the tenth year after the original owner’s death.

There are no requirements for how the funds are distributed within those 10 years. However, taking too much in one year may have a negative impact on your tax bracket. Eligible designated beneficiaries may also employ the life-expectancy method, but neither non-spousal group may grow the inherited Roth as their own as they could before the SECURE Act. 

Key Takeaways

  • Inherited Roth IRAs are retirement accounts left to a beneficiary where the funds are available for distribution without tax penalty, so long as a five-year holding requirement has been met.
  • Due to the SECURE Act, any Roth IRAs inherited after Dec. 31, 2019 are subject to stricter rules for non-spousal beneficiaries. 
  • If you inherit an IRA from your spouse, you may roll it over into your own IRA and allow the funds to continue to grow before taking tax-free distributions at age 59½. 

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