What You Need to Know About Being a Roth IRA Beneficiary After 2020

Receiving an inherited Roth IRA can feel like a financial blessing—but it comes with strings attached. The rules governing how you handle these accounts have shifted significantly since the SECURE Act became law in 2019, and understanding your obligations as a Roth IRA beneficiary is critical to avoiding unexpected tax bills. Let’s break down your options based on who you are and your relationship to the deceased account owner.

The SECURE Act Changed Everything for Inheritors

Before 2020, Roth IRA beneficiaries could stretch distributions across their entire lifetime using the “stretch IRA” strategy. That flexibility largely disappeared for account owners who passed away in 2020 or later. Now the question isn’t just how to withdraw your inheritance—it’s when you’re legally required to do so.

Fail to follow the new required minimum distribution (RMD) rules for inherited accounts, and the IRS penalty is brutal: up to 25% of the amount you should have distributed for any year (if distributions were due in 2023 or later). For 2022 and earlier, the penalty was 50%. These numbers explain why getting your strategy right matters.

Understanding Your Roth IRA Beneficiary Status

Not all Roth IRA beneficiaries are treated equally. Your exact relationship to the deceased determines which distribution options are actually available to you—and this is where many people stumble.

If You’re the Surviving Spouse

As a spousal Roth IRA beneficiary, you have flexibility that others don’t. You can elect to treat the inherited Roth IRA as your own by rolling it into a new or existing Roth account in your name. This approach is typically the smartest move because:

• You avoid taking any distributions during your lifetime (unless you want to)
• Your money continues growing tax-free within the account
• You inherit the deceased’s contribution history, not just the assets

However, watch out for the five-year rule. If fewer than five years have passed since January 1st of the year your spouse first contributed, you’ll owe ordinary income tax if you withdraw investment earnings. The IRS assumes your distributions come from contributions first, then conversions, then earnings—so you might avoid this tax trap anyway if your account is substantial.

If you don’t want to treat it as your own, two alternatives exist. You could establish an inherited Roth account and use the life expectancy method, which requires you to start taking RMDs when your spouse would have turned 73 (or by December 31st the year after death, whichever is later). Or you could use the 10-year distribution method: withdraw as much or as little as you want, but empty the account completely by December 31st of the 10th year following death. Both options still trigger the five-year rule for earnings.

The life expectancy approach adds complexity if you’re under 59½, since you’d be taking RMDs but potentially facing a 10% penalty on earnings withdrawals. Discussing these tradeoffs with a fee-only certified financial planner is worth the cost.

Non-Spouse Designated Beneficiaries

If you’re not the spouse but were named directly as a Roth IRA beneficiary (through a transfer-on-death designation with the financial institution), you’re a designated beneficiary—but you have fewer options.

You cannot simply roll the money into your own Roth IRA. Instead, you must open what’s called a “beneficial designated Roth IRA” account, and the deceased’s assets must move directly from their account to yours via trustee-to-trustee transfer. Any other transfer method counts as a distribution and triggers immediate tax consequences. No indirect rollovers are permitted.

Your deadline is December 31st of the 10th year following the original account holder’s death. That 10-year window gives you time, but you must completely empty the account by then.

Eligible Designated Beneficiaries (Special Category)

Some non-spouse Roth IRA beneficiaries qualify for special treatment if they fall into three specific categories:

Individual less than 10 years younger than the deceased – This could be a friend, sibling, cousin, or even a parent or aunt/uncle (anyone older than the deceased qualifies here too).

Chronically ill or permanently disabled individual – You must require ongoing assistance with at least two daily living activities or be unable to work due to physical or mental condition.

Minor child of the deceased – Children under 21 can take annual distributions based on life expectancy until reaching age 21. After age 21, they become regular designated beneficiaries and have 10 years from December 31st following their 21st birthday to empty the account.

Eligible designated Roth IRA beneficiaries can take distributions as a lump sum, spread them over 10 years, or use the life-expectancy method. Distributions must begin by December 31st of the year after the original owner’s death.

Non-Designated Beneficiaries (Least Favorable)

If the inherited account went to an estate, non-qualified trust, or charity—typically because no individual beneficiary was named—you’re a non-designated beneficiary. This is the worst position to be in: you only have five years to fully distribute the account. No exceptions, no alternatives.

Trusts Complicate the Picture

Some people intentionally name a trust as their Roth IRA beneficiary for creditor protection or to manage distributions to minor or irresponsible heirs. The trust itself then becomes responsible for managing and distributing the Roth assets.

A “see-through” (look-through) trust gets 10 years to complete distributions. A “non-see-through” trust only gets five years. Whether distributions sit within an accumulation trust or flow through a conduit trust to actual beneficiaries creates different tax outcomes, so the trust structure matters enormously.

The Bottom Line for Roth IRA Beneficiaries

Your inheritance strategy depends entirely on who you are relative to the deceased. Spouses enjoy the most flexibility. Direct designated beneficiaries have moderate constraints. And non-designated beneficiaries face a strict five-year clock. Missing deadlines or choosing the wrong distribution method transforms what should be a tax-advantaged windfall into a tax nightmare—potentially costing you thousands in penalties and unexpected income taxes.

Take time to understand which Roth IRA beneficiary category you fall into, then choose your distribution strategy accordingly. The rules are complex, but getting them right protects your inheritance.