Understanding the Five-Year Clock for Inherited Roth IRAs

When someone executes a Roth conversion, those funds must generally remain in the Roth IRA for at least five years before the earnings can be withdrawn tax-free.  Non-spouse beneficiaries who inherit Roth IRAs also inherit the original owner's five-year "clock".  So, even if the non-spouse beneficiary who inherited the account had their own IRA for more than five years prior to inheriting the account, they must still wait for the original account owner's holding period to run out before accessing the earnings tax-free.  However, these taxpayers should note the ordering rules that apply to Roth IRA distributions.  Any Roth distributions are first treated as though they are coming from direct contributions to the plan.  After all amounts that are directly contributed have been withdrawn, subsequent distributions are treated as though they come from converted amounts.  Only once all contributions and conversions have been withdrawn is the beneficiary considered to reach the earnings on those amounts which can be taxable if the five-year clock hasn't run out.  For more information on the rules governing Roth conversions, visit Tax Facts Online. Read More: Link to Q3662.