January 2025
If you’ve inherited an Individual Retirement Account (IRA), the IRS is implementing
important rule changes for 2025 that could significantly affect your tax situation.
Understanding these updates—and planning accordingly—can help you avoid steep
penalties and make the most of your inheritance.
What’s Changing in 2025
Beginning in 2025, most beneficiaries of inherited IRAs will be required to take annual
required minimum distributions (RMDs) under the 10-year rule. This means that,
unless you qualify for an exception, the entire IRA balance must be distributed by the
end of the tenth year following the original owner’s death.
Failure to take the required distributions could result in a penalty of up to 25% of the
missed RMD amount—though timely correction can reduce the penalty to 10%.
While these rules may feel restrictive, there are still strategic tax planning opportunities
available. The key is understanding how the regulations apply to your situation and
working with your CPA or financial advisor to minimize the tax impact.
Background: The SECURE Acts and Their Impact
The SECURE Act of 2019 and SECURE 2.0 Act of 2022 transformed the landscape
for inherited IRAs and RMDs:
SECURE Act of 2019:
o Raised the RMD age from 70½ to 72.
o Replaced the five-year withdrawal rule with the 10-year rule for many
beneficiaries.
SECURE 2.0 Act of 2022:
o Increased the RMD age again—to 73 for individuals turning 72 after 2022,
and to 75 for those born in 1960 or later.
o Reduced the penalty for missed RMDs from 50% to 25% (and to 10% if
corrected promptly).
The popular “stretch IRA” strategy—where beneficiaries could take distributions over
their life expectancy—remains available only for certain beneficiaries if the original
account holder passed away before January 1, 2020.
Understanding the 10-Year Rule
Under the 10-year rule, most non-spouse beneficiaries must withdraw the entire
balance of an inherited IRA by the end of the tenth year after the original owner’s
death, regardless of whether that person had begun RMDs.
The IRS provided penalty relief from 2020 through 2024, but starting in 2025, the 25%
excise tax will be enforced. Missing a $10,000 RMD, for example, could result in a
$2,500 penalty—reduced to $1,000 if promptly corrected.
Options for Surviving Spouses
Surviving spouses enjoy more flexibility than other beneficiaries. There are two primary
options:
1. Assume the IRA as Your Own:
You can treat the inherited IRA as your own, deferring RMDs until the year your
late spouse would have reached their RMD age. For example, if your spouse
died in 2024 at age 55, RMDs wouldn’t begin until 2045 (the year after they
would have turned 75).
2. Elect to Be Treated as a Beneficiary:
This allows you to access funds without the 10% early withdrawal penalty if
you’re under age 59½.
For Roth IRAs, assuming ownership means no RMDs during your lifetime—allowing
the account to continue growing tax-free. Converting a traditional IRA to a Roth can also
provide long-term tax benefits, though this requires careful timing and planning.
Special Rules for Minor and Disabled Beneficiaries
Minor Children: The 10-year clock begins when the child reaches age 21, giving
them until age 31 to fully deplete the account.
Disabled or Chronically Ill Beneficiaries: These individuals are generally
exempt from the 10-year rule as long as they continue to meet IRS definitions
of disability.
Tax Planning Strategies for Other Beneficiaries
If you’re a non-spousal beneficiary subject to the 10-year rule, thoughtful planning can
help reduce your tax exposure:
Spread Distributions Evenly: Taking withdrawals over 10 years can prevent
your income from spiking into higher tax brackets.
Time Withdrawals Strategically: Consider delaying or accelerating withdrawals
depending on expected future tax rates.
Coordinate with Your CPA: Integrating inherited IRA distributions into your
broader tax strategy can help optimize your overall financial picture.
For example, if you inherit a $100,000 IRA and are near the 32% bracket, spreading
distributions evenly might keep you within the 24% bracket—potentially saving
thousands in taxes.
Key Takeaways
The 10-year rule is here to stay. Most beneficiaries must fully distribute
inherited IRAs within ten years.
Penalties are significant. The 25% excise tax for missed RMDs begins in 2025.
Spouses have options. Choose carefully between assuming ownership or being
treated as a beneficiary.
Planning matters. With proactive tax planning, you can minimize taxes and
preserve more of your inheritance.
Need Help Navigating the New Rules?
Inherited IRA rules are complex, and missteps can be costly. Our team of experienced
CPAs can help you understand your options and develop a personalized strategy to
meet your financial goals while minimizing taxes.
Contact us today to discuss how these 2025 changes may affect your situation.
