What happens to a Roth IRA’s five year clock when the owner dies?
Key takeaway
The Roth IRA’s five taxable year qualification clock does not restart at death, and a beneficiary’s distribution qualifies only after that period ends.
The deceased owner’s holding period counts. Death satisfies the separate qualifying event requirement for a distribution to a beneficiary or the owner’s estate, with no additional age 59½ requirement.
How to count the qualification period
The period starts on the first day of the taxable year for which the owner’s first regular contribution to any Roth IRA was made, or the taxable year of the first conversion contribution, if earlier.
It ends on the last day of the fifth consecutive taxable year. The owner has one qualification period across all their Roth IRAs, rather than a separate starting point for each account.
A contribution returned as a corrective distribution is treated as never contributed when identifying that starting point.
Gather the owner’s earliest Roth contribution or conversion records before deciding that a withdrawal will qualify. The date you inherited the account does not establish the start of this clock.
The surviving spouse choice changes the analysis
While you hold the account as a beneficiary, its qualification clock stays independent of your own Roth IRA clock.
A surviving spouse can elect to treat an inherited IRA as their own only if they are the sole beneficiary and have an unlimited right to withdraw. Naming a trust fails this requirement, even if the spouse is its sole beneficiary.
With that election, the qualification period for all the spouse’s Roth IRAs ends at the earlier end of the deceased owner’s period or the spouse’s own period.
The spouse then cannot use the deceased owner’s death as the qualifying event. Qualification requires the period to end plus an applicable event for the spouse’s own account.
Those events include reaching age 59½, disability within section 72(m)(7), or a first home distribution satisfying section 72(t)(2)(F). Review the withdrawal you intend to make before choosing how to hold the account.
Income tax before the period ends
Qualified distributions are excluded from gross income. A nonqualified beneficiary distribution can also be excluded to the extent it returns contributions.
For a nonqualified distribution, add the current distribution and all prior distributions, then subtract prior distributions previously included in gross income. The amount exceeding contributions is taxable.
This calculation excludes qualified rollover contributions and corrective distributions. Corrective distributions are treated as never contributed, and amounts a nonspouse beneficiary receives from an inherited IRA cannot be rolled over.
Distribution ordering is determined at the end of the taxable year. Each category is exhausted before the next:
- Regular contributions come first.
- Conversion contributions come next, with the earliest conversion first. Within each conversion, amounts included in income at conversion come out before amounts not included in income.
- Earnings come last.
Distributions during the taxable year are aggregated within the permitted account group. An inherited Roth IRA cannot be combined with your own Roth IRA or accounts inherited from a different deceased owner for this purpose.
Other Roth IRAs inherited from the same deceased owner may be combined. The inherited account restriction does not apply when a sole spouse beneficiary elects own account treatment under the requirements above.
Keep the payout deadline separate
The qualification clock determines whether a distribution qualifies for income tax purposes. The beneficiary payout rules determine when money must leave the account.
Roth IRA owners have no required minimum distributions during life. After death, beneficiary distribution rules apply as though the owner died before the required beginning date.
A designated beneficiary who is not an eligible designated beneficiary must empty the inherited Roth IRA by the end of the calendar year containing the tenth anniversary of death.
When that ten year rule applies, no distribution is required before the tenth year. This does not describe beneficiaries taking life expectancy payments or accounts subject to the five year payout rule.
Two related terms
Qualified distribution. A Roth IRA distribution made after the qualification period ends and satisfying a qualifying event. For a beneficiary or the owner’s estate receiving a distribution on or after death, death supplies that event.
Eligible designated beneficiary. At the owner’s death, this category includes the surviving spouse, the owner’s child under 21, a disabled or chronically ill individual, or someone no more than ten years younger than the owner. Chronic illness requires certification of an indefinite, lengthy inability, and the owner’s child leaves this category at 21.
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Common questions
Does a beneficiary withdrawal before the period ends trigger the 10% additional tax?
No, if you receive it as a beneficiary or the owner’s estate on or after death, the death exception applies to the 10% additional tax. It does not exclude otherwise taxable earnings or make the distribution qualified.
A spouse withdrawing from an account treated as their own needs a separate additional tax analysis.
Is a conversion’s five year period the same clock?
No. Each conversion has a separate five taxable year additional tax period, independent of the qualification clock.
A nonqualified withdrawal within that conversion period can trigger the 10% additional tax on amounts included in income at conversion, even though those amounts are not taxed again as income. Section 72(t) exceptions, including the beneficiary death exception, apply.
Can one beneficiary receive all the regular contribution basis?
No, if there are multiple beneficiaries and the owner dies before the qualification period or a conversion’s five taxable year period ends, each beneficiary receives a proportionate share of each contribution type. Later withdrawals follow the distribution ordering rules above.
Does the estate get the same ten year payout deadline?
No. If the estate is the beneficiary and there is no designated beneficiary, the inherited Roth IRA must be emptied by the end of the calendar year containing the fifth anniversary of death.
That payout deadline is separate from the qualification clock.
Sources
- 26 CFR §1.408A-6, qualification periods, beneficiary treatment, income calculation, ordering and conversions.
- 26 U.S.C. §72(t), additional tax and death exception.
- 26 CFR §1.408-8, spouse election and Roth IRA beneficiary distribution rules.
- 26 CFR §1.401(a)(9)-3, beneficiary payout deadlines.
- 26 CFR §1.401(a)(9)-4 and 26 U.S.C. §401(a)(9)(E), beneficiary categories.
- IRS Publication 590-B, inherited IRA distributions and the applicable ten year rule.
- 26 U.S.C. §408(d)(3)(C), nonspouse inherited IRA rollover restriction.