Heir to a Father’s Roth IRA Faces Tax on Earnings Because the Five-Year Rule Continues to Run, and the 10-Year Payout Deadline Still Applies

A daughter inherited her father’s Roth IRA, assumed the money would all be tax-free, and withdrew the entire balance to help pay down her mortgage. What she overlooked about the account’s five-year rule ended up costing her more than she expected.

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In March 2026, a 51-year-old woman inherited her father’s Roth IRA. He had opened it in 2023 by converting $200,000 from a traditional IRA. When the custodian retitled it as an inherited Roth IRA, the account had grown to $240,000.

She had long believed Roth withdrawals were always tax-free. In the fall, she took out the entire balance to reduce her mortgage. Her CPA later told her that $40,000 of that withdrawal must be reported as taxable income on her 2026 return.

The Roth designation was not the issue. The problem was timing. Her father’s account had not yet satisfied the five-year requirement, and she withdrew the earnings a little more than a year too soon.

Her Father’s Five-Year Clock Kept Running After Death

A Roth distribution must meet two conditions to be tax-free. First, the distribution must qualify under the event rule. Under 26 U.S.C. § 408A(d)(2)(A)(ii), a payment made to a beneficiary after the owner’s death automatically satisfies that test.

The second condition is time. Section 408A(d)(2)(B) denies qualified treatment to any distribution made during the five-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 begins that period on January 1 of the year of the owner’s first regular contribution or first conversion. Under A-7(a), the clock does not restart at death, and the time the heir holds the account is added to the time the father already accumulated. Under A-7(b), the inherited Roth is tracked separately from the heir’s own Roth IRAs, so an older personal Roth does not shorten the wait.

Her father’s first Roth funds went in during 2023. That means the five-year period ran from January 1, 2023, through December 31, 2027. Any earnings distributed before January 1, 2028, are taxable.

What the $240,000 Inheritance Means Tax-Wise

Roth withdrawals follow a set order. Under A-8, distributions come first from regular contributions, then from conversions on a first-in, first-out basis, and only after that from earnings. Under A-4, a nonqualified distribution is taxable only to the extent it exceeds total contributions.

That means her father’s $200,000 conversion was returned tax-free. The remaining $40,000 of earnings is treated as ordinary income. A nonqualified beneficiary distribution is taxed the same way it would have been if the original owner had withdrawn it.

She does not owe the 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 applies to converted money still within its own five-year window.

Because she files as single and already falls in the 24% bracket, IRS tables place her income range between $103,351 and $197,300 of taxable income for single filers. If the full $40,000 of earnings is taxed at that rate, the federal bill comes to $9,600, before any state income tax.

Waiting Until 2028 Would Have Avoided the Tax

She could have taken the full $200,000 of conversion money in 2026 for her mortgage and paid no tax. If she had simply left the $40,000 of earnings in the inherited account until January 2028, those earnings would have qualified for tax-free treatment. The delay alone would have saved her $9,600.

The stronger strategy would have been to leave the full account invested. Roth IRAs are treated as though the owner died before the required beginning date, so an adult child who is not an eligible designated beneficiary does not face annual required minimum distributions. Instead, there is a single deadline. Section 401(a)(9)(H)(i) stretches the old five-year payout rule to 10 years, requiring the account to be emptied by the end of the 10th calendar year after the year of death. With a 2026 death, that deadline is December 31, 2036.

From 2028 through that deadline, growth would have remained fully tax-free. The five-year rule and the 10-year payout deadline operate at the same time, and one does not pause for the other.

What to Do Before Taking Money From an Inherited Roth

• Identify the start year. Ask the custodian for the year of the decedent’s first Roth contribution or conversion, then confirm it with Form 5498 statements and the Form 8606 filed for any conversion year.
• Calculate the basis. Add together all contributions and conversions. That total can be withdrawn tax-free at any time, before or after the five-year mark.
• Preserve the earnings. Leave anything above basis in the account until January 1 of the sixth year after the first contribution.
• Track the final deadline. Mark the end of the 10th year after death on the calendar and plan the final distribution well before then.
• Confirm spousal treatment. A surviving spouse who treats the account as her own follows different rules under A-3 and A-7(b).

A CPA or estate attorney can compare these dates with your family’s records before any withdrawal is made. The inherited Roth five-year trap is one of several tax rules that can cost retirement accounts six figures, and we outlined the rest in a free report.

The key figure is $9,600. That is the federal tax cost of withdrawing $40,000 in Roth earnings before the father’s five-year clock expired. A calendar and a bit of patience would have avoided the entire bill.