From 24/7 Wall St. · Vilma Rios · · 1m 10s
Inherit a Roth IRA Tax Trap
Daughter loses $9,600 tax bill by withdrawing Roth IRA earnings too early.
In brief
Daughter loses $9,600 tax bill by withdrawing Roth IRA earnings too early. Daughter paid $9,600 federal tax on $40,000 Roth IRA earnings withdrawn before the five-year clock expired. Originally reported by 24/7 Wall St..
Inherited Roth IRA
Daughter inherited father's Roth IRA opened in 2023 with $200,000 conversion.
Tax-Free Timing Mistake
She withdrew full $240,000 balance in 2026, but $40,000 earnings were taxable.
Five-Year Clock Rules
Father's five-year clock started in 2023 and runs for 10 years after death.
Taxable Earnings
The $40,000 earnings were taxed at 24% federal rate, costing $9,600.
Tax-Free Wait Period
Leaving earnings until January 1, 2028 would have made them tax-free.
Ten-Year Deadline
Account must be emptied by December 31, 2036, the 10th year after death.
Steps to Avoid Tax
Check start year, total basis, hold earnings, mark deadline, check spousal status.
Key Tax Figure
The $9,600 federal tax bill represents the cost of early Roth earnings withdrawal.
Tax Trap Consequence
Daughter paid $9,600 federal tax on $40,00:00 earnings withdrawn too early.
The essence
Daughter paid $9,600 federal tax on $40,000 Roth IRA earnings withdrawn before the five-year clock expired.
