Widower Inheriting $250,000 Roth IRA Faces Tax on Earnings Under 5-Year Rule
Updated
Updated · 24/7 Wall St. · Jul 2
Widower Inheriting $250,000 Roth IRA Faces Tax on Earnings Under 5-Year Rule
2 articles · Updated · 24/7 Wall St. · Jul 2
Summary
$250,000 in inherited Roth IRA assets are not fully tax-free for a widower because his late wife's account was opened only three years before her death, leaving the earnings portion taxable if withdrawn now.
The five-year rule for inherited Roths applies to earnings, not original contributions, so he can access contribution dollars immediately while waiting two more tax years for growth to become tax-free.
A surviving spouse can improve the outcome by rolling the account into his own Roth; if he already has a Roth opened more than five years ago, IRS aggregation rules can make the inherited balance effectively seasoned.
Brokerage statements and past tax returns are key to separating contributions, conversions and investment gains before any withdrawal, since that cost-basis split determines what can come out without tax.
The issue could affect many Baby Boomers: average IRA balances are about $257,002, and a wave of recent Roth conversions means more inherited accounts may still be inside the five-year window.