Many investors spend decades building wealth inside their Roth IRA. Eventually an important question arises: what happens to that account when it passes to the next generation?
Roth IRAs can be one of the most valuable assets your children inherit. Because the taxes have already been paid, the account can continue growing tax-free, and distributions are generally tax-free to beneficiaries.
Retirement account inheritance rules changed significantly under the SECURE Act. Most children who inherit a Roth IRA are now subject to what is known as the 10-year rule and new inherited Roth IRAs cannot be stretched out over the life
While this rule requires the account to be distributed within 10 years, it also creates a powerful opportunity: another decade of tax-free compounding.
Understanding how this works can dramatically increase the long-term value of the wealth you pass down.
Why Roth IRAs Are Powerful Assets to Leave Your Children
From an estate planning perspective, Roth IRAs have a unique advantage over traditional IRAs: the taxes have already been paid.
Because Roth contributions are made with after-tax dollars, beneficiaries can withdraw the funds income-tax free, assuming the Roth IRA has been in existence for 5 years…
Traditional IRA Comparison
If a child inherits a traditional IRA, distributions are typically taxed as ordinary income.
For example, if someone inherits a $1 million traditional IRA and withdraws the funds while in a 35% federal and state tax bracket, the after-tax value and what they actually receive would be closer to $650,000. If, on the other hand, you inherit a Roth IRA you would receive the full $1 million as there is no state or federal tax assessed.
Taxable Brokerage Account Comparison
If someone inherits a brokerage account, they may receive a step-up in basis, meaning prior gains are not taxed. What this means is if you inherit stock in a brokerage account bought at $50 a share that is worth $80 a share at the time of death, the person inheriting gets a step-up the basis to the value at the date of death which means they can sell and there will be no capital gains tax. However:
- Future investment growth after the date of death becomes taxable
- Dividends and capital gains will be taxed going forward
Getting a step-up in basis is a big advantage, but it’s not as powerful as a Roth IRA.
Roth IRA Advantage
With a Roth IRA:
- The account transfers income-tax free
- Growth can continue tax-free
- Distributions to beneficiaries are tax-free
For many families, the ability to inherit tax-free and continue to grow for another 10 years tax-free makes the Roth IRA one of the most tax-efficient assets to pass to the next generation.
The Five-Year Rule for Inherited Roth IRAs
One important rule that still applies after death is the five-year holding requirement.
For inherited Roth IRAs:
- If the original owner opened the Roth IRA at least five years before death, distributions to beneficiaries are generally fully tax-free.
- If the account has not met the five-year rule, withdrawals of earnings are taxable until the five-year period is satisfied.
In practice, most Roth IRAs that are inherited have been open for several years already and will have met this requirement. It’s also worth noting that the 5 year rule only need to be met once per person so if someone had a Roth IRA at Fidelity they opened in 2010 and a Directed IRA Roth IRA that they opened in 2024 and they pass away in 2026 the five year rule is met for both accounts as the five year rule applies across all Roth IRAs once a person has held any Roth IRA for 5 years.
The 10-Year Rule for Children Inheriting a Roth IRA
The SECURE Act introduced the 10-year distribution rule for most non-spouse beneficiaries.
This includes adult children who inherit a parent’s Roth IRA.
How the Rule Works
When a child inherits a Roth IRA:
- The beneficiary opens an Inherited Roth IRA.
- The funds can remain invested within that new inherited Roth IRA account and the new owner can sell investments, transfer the inherited Roth IRA to another custodian and has full control of the account. .
- The account must be fully distributed by the end of the 10th year after the original owner’s death.
Unlike traditional inherited IRAs, there are no annual required minimum distributions during this period for Roth IRAs.
This means the beneficiary has flexibility.
They can:
- Take withdrawals during the 10-year window as needed, or
- Allow the account to remain invested and withdraw everything in year 10. This would be the most advantageous route for someone who doesn’t need to live off of the account yet as they can keep growing and compounding the account tax-free.
The Real Opportunity: 10 More Years of Tax-Free Compounding
Many people see the 10-year rule as a restriction.
In reality, it also creates a powerful additional compounding window where you can double the value of the account over 10 years if you get a 7.2% annual return each year over the 10 year window.
Example: $300,000 Roth IRA Inheritance
Assume a child inherits a $300,000 Roth IRA.
If the account earns an average 8% annual return, the Rule of 72, which is a mathematical equation that tells you the rate of return you need for your money to double, suggests the investment could double in roughly nine years.
Over the 10-year inheritance window:
- $300,000 could grow to more than $600,000
- All growth remains tax-free
- The entire distribution is generally tax-free
This additional compounding window is where much of the Roth IRA’s inheritance power comes from.
Should Beneficiaries Withdraw the Account Immediately?
Beneficiaries are allowed to withdraw the entire inherited Roth IRA soon after inheriting it.
However, in most situations that may not be the most financially advantageous decision.
Allowing the account to remain invested provides:
- Continued tax-free growth
- No required annual withdrawals
- The potential for significantly larger long-term value
Because of this, some families choose to use other inherited assets first, such as brokerage accounts or real estate, while allowing the Roth IRA to continue compounding.
Special Rules for Spouses
Inheritance rules are different when the beneficiary is a spouse.
A surviving spouse has the option to perform a spousal rollover.
With a spousal rollover:
- The spouse treats the Roth IRA as their own account
- The account becomes their personal Roth IRA
- The 10-year rule does not apply
Children and other non-spouse beneficiaries do not have this option and must use an Inherited Roth IRA subject to the 10-year distribution rule.
Unlike spousal rollover Roth IRAs, Inherited Roth IRAs also cannot be merged into a child’s personal Roth IRA. They must remain separate accounts.
Should Your Kids Be Named as Beneficiaries?
Whether children should be named directly as a Roth IRA beneficiaries depends on each family’s circumstances.
Situations Where Direct Beneficiaries May Make Sense
For example:
- A parent is single
- The surviving spouse is financially secure
- The children are financially responsible and prepared to manage the inheritance
Situations Where Naming a Spouse First May Be Better
In many cases, naming the surviving spouse first provides more flexibility.
This allows:
- Continued tax-free growth during the spouse’s lifetime
- Additional estate planning opportunities
- More time for children to become financially mature
When the spouse later passes away, the Roth IRA would then transfer to the children and begin their own 10-year inheritance window.
Teaching the Next Generation About Wealth
While the Roth IRA itself is powerful, the long-term value often comes from financial behavior.
Families that involve their children in learning about investing and retirement accounts often see meaningful long-term benefits.
When children understand how Roth accounts grow – and why tax-free compounding matters. It can permanently influence their financial habits.
Final Thoughts
- Roth IRAs are one of the most tax-efficient assets families can pass to the next generation.
- Although most children who inherit a Roth IRA are subject to the 10-year rule, that rule also provides an opportunity: another decade of tax-free compounding.
- When beneficiaries understand how to use that window effectively, a Roth IRA can become a powerful tool for building multi-generational wealth.
Disclaimer:
All information provided is for educational purposes only and should not be considered legal, tax, or investment advice. Individuals should consult their own legal, tax, and financial advisors when making decisions about retirement accounts or estate planning.
