The answer to the question of whether an inherited IRA has to be distributed in 5 years depends on several factors, including:
- The type of IRA: The 5-year rule applies to traditional and Roth IRAs, but not to SEP or SIMPLE IRAs.
- The beneficiary’s relationship to the deceased: Spouses and certain other beneficiaries are exempt from the 5-year rule.
- The age of the beneficiary: If the beneficiary is under age 59 1/2, they may have to pay a 10% penalty on early withdrawals.
The 5-Year Rule for Traditional IRAs
Under the 5-year rule for traditional IRAs, beneficiaries must withdraw all funds from the account within 5 years of the original account holder’s death. This means that the beneficiary cannot stretch out the distributions over a longer period of time, as they could with a traditional IRA that they inherited before the SECURE Act was passed in 2019.
The 5-year rule for traditional IRAs applies to all beneficiaries, except for spouses and certain other beneficiaries who are exempt from the rule. These exempt beneficiaries include:
- Minor children of the deceased
- Disabled or chronically ill beneficiaries
- Beneficiaries who are not more than 10 years younger than the deceased
If the beneficiary is exempt from the 5-year rule, they can choose to withdraw the funds from the inherited IRA over a longer period of time, or they can roll the funds over into their own IRA.
The 5-Year Rule for Roth IRAs
The 5-year rule for Roth IRAs is a bit more complicated. Under the rule, beneficiaries must withdraw all funds from the inherited Roth IRA within 5 years of the original account holder’s death, but they can choose to withdraw the funds in installments over that 5-year period. This means that the beneficiary does not have to withdraw all of the funds at once, as they would with a traditional IRA.
The 5-year rule for Roth IRAs applies to all beneficiaries, except for spouses who are exempt from the rule. If the beneficiary is exempt from the 5-year rule, they can choose to withdraw the funds from the inherited Roth IRA over a longer period of time, or they can roll the funds over into their own Roth IRA.
Exceptions to the 5-Year Rule
There are a few exceptions to the 5-year rule. For example, if the beneficiary is disabled or chronically ill, they may be able to take longer to withdraw the funds from the inherited IRA. Additionally, if the beneficiary is the surviving spouse of the deceased, they may be able to treat the inherited IRA as their own, which means that they would not be subject to the 5-year rule.
The 5-year rule can be a complex topic, but it is important to understand the rules so that you can make informed decisions about how to handle an inherited IRA. If you have any questions about the 5-year rule, you should speak to a financial advisor.
Frequently Asked Questions
What is the 5-year rule?
The 5-year rule is a rule that applies to traditional and Roth IRAs that are inherited by non-spouse beneficiaries. Under the rule, beneficiaries must withdraw all funds from the inherited IRA within 5 years of the original account holder’s death.
Who is exempt from the 5-year rule?
Spouses and certain other beneficiaries are exempt from the 5-year rule. These exempt beneficiaries include:
- Minor children of the deceased
- Disabled or chronically ill beneficiaries
- Beneficiaries who are not more than 10 years younger than the deceased
What happens if I don’t withdraw all of the funds from the inherited IRA within 5 years?
If you don’t withdraw all of the funds from the inherited IRA within 5 years, you will have to pay taxes on the remaining balance. Additionally, if you are under age 59 1/2, you may have to pay a 10% penalty on early withdrawals.
Can I roll over an inherited IRA into my own IRA?
Yes, you can roll over an inherited IRA into your own IRA. However, if you do this, you will be subject to the 5-year rule for the new IRA.
What should I do if I have questions about the 5-year rule?
If you have questions about the 5-year rule, you should speak to a financial advisor.
How the 5-Year Rule Works
The initial account holder may receive distributions of contributions made to a Roth IRA at any time. However, you must be at least 59½ years old and the account must be five years old in order to withdraw funds from your Roth without incurring taxes or penalties. You must have established and maintained the Roth for at least five tax years, even if you are already 59½. That, in a nutshell, is the 5-year rule for Roths.
The 5-year rule only sets a time limit on when you can take your Roth IRA earnings out. This includes any interest, capital gains, dividends, and other income that has accrued from your Roth investments. Since your contributions were made with after-tax money and you did not receive a tax deduction when you deposited them into your Roth, they are not capped. Thus, there is no penalty or tax associated with withdrawing your contributions whenever and whenever you choose, according to the IRS.
When you make your first contribution to a Roth IRA, the five-year clock begins to run. Therefore, when converting from a traditional IRA to a Roth IRA, the clock rule also applies.
Whether the principal distribution from converting a traditional IRA to a Roth IRA is penalty-free is determined by the second 5-year rule. (You pay taxes upon conversion. IRS regulations state that the oldest conversions are withdrawn first, but each conversion has its own five-year period. For Roth IRA withdrawals, contributions come first, then conversions, and finally earnings.
If you take money out of your Roth IRA or withdraw earnings before the five-year period is up, the IRS will consider your withdrawal to be an unqualified distribution. Unqualified distributions are liable to taxes at your current ordinary income tax rate plus a 2010 percentage penalty. This could be a significant additional tax. For example, if you were in the 2024–40 tax bracket, you would see 2024–40 percent of your Roth IRA earnings evaporate in taxes and penalties because you withdrew the earnings before five years had passed.
What Is the 5-Year Rule for Roth IRA?
According to the Roth IRA 5-year rule, you are not allowed to withdraw any earnings from your account until five years have passed since you made your first contribution.