Understanding Your Inherited Roth IRA: What Every Beneficiary Must Know

When you inherit a Roth IRA, you’ve received more than just money—you’ve inherited a complex set of tax rules that demand immediate attention. The decisions you make in the first few months can cost you thousands in unnecessary taxes and penalties. Here’s what you need to navigate this inheritance correctly.

The Rules Changed in 2020—Here’s Why It Matters

Before 2019, inheriting a Roth IRA meant you could potentially enjoy decades of tax-free growth through what’s known as the stretch strategy. That changed when Congress passed the SECURE Act. Now, if the original account holder passed away in 2020 or later, you face stricter distribution deadlines that can significantly impact your financial flexibility.

The stakes are real: fail to take required minimum distributions (RMDs) on time, and the IRS will penalize you up to 25% of the amount you should have withdrawn that year if the missed distribution was due in 2023 or later. Before 2023, the penalty was 50%. These aren’t small fees—they’re substantial hits to your inheritance.

Why a Roth IRA Was Special to Begin With

Understanding what makes a Roth IRA valuable helps explain why the inherited version comes with so many rules. Regular Roth IRA owners contribute money that’s already been taxed, then watch their money grow completely tax-free. When they withdraw, they owe nothing to the IRS. This contrasts sharply with traditional IRAs, where contributions reduce your taxes initially, but you’ll owe income taxes on every dollar you withdraw later.

Perhaps the most generous feature: Roth IRA owners never have to withdraw money during their lifetime. They can let the account compound indefinitely. Traditional IRA owners, by contrast, must start taking distributions sometime between ages 70½ and 75, depending on their birth year. That flexibility disappears for beneficiaries, however.

If You’re the Surviving Spouse: You Have the Most Options

Spouses who inherit a Roth IRA enjoy advantages others don’t. You have three legitimate paths forward.

Option One: Treat It as Your Own

The simplest choice for most surviving spouses is performing what’s called a spousal transfer. You move the inherited Roth assets into a new or existing Roth IRA registered in your name. This essentially erases the inheritance distinction—the money now belongs to you outright, just like any other Roth account you own.

The advantage is powerful: you eliminate distribution requirements entirely. Keep the money invested for as long as you want, allowing tax-deferred growth to continue building. When you finally withdraw, you follow standard Roth rules, not inherited Roth rules. The five-year rule still applies if fewer than five years have passed since your spouse first contributed to the account (measured from January 1st of that year). During this five-year window, investment earnings withdrawn are taxed as ordinary income. However, distributions are assumed to come from contributions first, then conversions, then earnings—so you’ll likely avoid triggering this tax if you’re not taking huge withdrawals early on.

Option Two: Use the Life Expectancy Method

If you’re younger than 59½ and want the ability to withdraw earnings penalty-free, opening an inherited Roth IRA under the stretch method might appeal to you. You’d commit to taking RMDs based on your life expectancy starting when your deceased spouse would have reached age 73, or by December 31st of the year following their death, whichever is later.

This maintains flexibility if you’re willing to accept RMD obligations. Still, many financial advisors suggest this is the less attractive path compared to treating the account as your own, since you’re adding complexity and constraints.

Option Three: The 10-Year Window

As a sole beneficiary spouse, you can establish an inherited Roth IRA and take all distributions within 10 years following your spouse’s death. This means you can withdraw as much or as little each year, as long as the account reaches zero by December 31st of the 10th year. The five-year rule applies here too.

This option gives you maximum flexibility on timing while ensuring a defined endpoint. Many spouses find this attractive as a middle ground.

If You’re Not the Spouse: Your Rights Are More Limited

Your options depend on how you were designated.

You’re a Designated Beneficiary

If you were named directly on the account through a beneficiary designation (not through the estate), you’re a designated beneficiary. Unfortunately, you cannot simply move the inherited Roth IRA to your own account like a spouse can.

Instead, you must open a separate beneficiary designated Roth IRA account. The original account’s assets must transfer directly from the deceased’s financial institution to yours in what’s called a trustee-to-trustee transfer. Do not attempt any other transfer method. Any alternative process will be treated as a distribution—a distinction that could trigger massive unexpected tax bills.

Your deadline is firm: you must completely empty the inherited account by December 31st of the 10th year following the original owner’s death. You can withdraw the full balance in year one, spread it evenly across all 10 years, or take it in any pattern you prefer—the only requirement is that it’s gone by the deadline.

You’re an Eligible Designated Beneficiary

Some designated beneficiaries qualify for more generous treatment. You fall into this category if:

• You’re close in age to the deceased. This includes friends, siblings, or cousins who are fewer than 10 years younger than the original owner, plus anyone older (such as a parent or aunt).

• You have chronic illness or permanent disability. This means you need ongoing assistance with at least two activities of daily living, or you can’t work enough to support yourself due to physical or mental conditions.

• You’re the deceased’s minor child. Children under 21 can take annual distributions based on their life expectancy. Once they reach 21, they become regular designated beneficiaries and get 10 years from the December 31st following their 21st birthday to empty the account.

Eligible designated beneficiaries can take a lump sum, use the 10-year method, or follow the life-expectancy method. Regardless of which approach you choose, distributions must start by December 31st of the year following the account holder’s death.

You’re a Non-Designated Beneficiary

If you inherited through the estate (because no individual beneficiary was named), you’re a non-designated beneficiary. This category also includes non-qualified trusts and charities. You’ve drawn the short straw: you only get five years to empty the account entirely. No flexibility on timing beyond that window. After five years, any remaining balance is subject to taxation and penalties.

Special Situation: Leaving a Roth IRA to a Trust

Sometimes account holders designate a trust as beneficiary—perhaps to protect assets for a minor child, a dependent adult, or someone who struggles with financial decisions. Trusts that inherit Roth IRAs must distribute those assets, but the timeline depends on the trust structure.

A “see-through” or “look-through” trust receives 10 years to distribute everything. A non-see-through trust only gets five years. The tax consequences differ too, depending on whether the trust is an accumulation trust (holding funds until specific conditions are met) or a conduit trust (passing distributions directly to beneficiaries).

Making the Right Choice for Your Situation

Inheriting a Roth IRA isn’t just a financial event—it’s a decision point. Whether you’re a surviving spouse with multiple pathways or a designated beneficiary facing constraints, the choices you make in those first months will reverberate for years. Consider consulting with a fee-only certified financial planner who has no incentive to steer you toward any particular option. The cost of that consultation is likely far less than the cost of making the wrong move with your inherited Roth IRA.