If you’ve inherited an IRA from a parent, sibling, or anyone other than your spouse, the withdrawal rules are undergoing a significant change. Starting in 2025, you may need to adjust your financial strategy to avoid a hefty tax penalty.
What’s Changing for Inherited IRAs in 2025?
The IRS has finalized its guidance for non-spouse beneficiaries of inherited IRAs. For many, this means two key rules will now be strictly enforced:
- Annual Withdrawals are Back: Heirs must take required minimum distributions (RMDs) each year.
- The 10-Year Deadline Remains: The entire account must still be fully withdrawn by the end of the 10th year after the original owner’s death.
This primarily affects non-spouse beneficiaries whose loved one had already started taking their own RMDs before they passed away. Missing a required annual withdrawal can result in a steep 25% penalty on the amount that should have been taken. However, if you correct the mistake within two years, the penalty may be reduced to 10%.
The SECURE Act and the 10-Year Rule
Before the SECURE Act of 2019, many beneficiaries could “stretch” withdrawals over their own lifetime, allowing the account to grow tax-deferred for decades. The SECURE Act eliminated this popular strategy for most non-spouse heirs, replacing it with the 10-year rule.
For the past few years, there was confusion about whether annual RMDs were required during the 10-year window. The IRS provided a grace period, but that ends now. Starting in 2025, annual RMDs are mandatory for those affected.
How to Create a Smart Withdrawal Strategy
With these rules in place, strategic tax planning is more important than ever. Simply waiting until year 10 to withdraw the entire balance could trigger a massive tax bill, potentially pushing you into a much higher income tax bracket.
Instead, consider a more balanced approach:
- Spread it Out: Take withdrawals each year over the full 10-year period.
- Time it with Your Income: Consider taking larger withdrawals in years when your personal income is lower (e.g., between jobs or before you start collecting Social Security).
- Avoid the Penalty: At a minimum, be sure to take your required annual RMD to avoid the 25% penalty.
The goal is to manage the withdrawals in a way that minimizes your overall tax liability across the 10-year timeframe.
Frequently Asked Questions (FAQ)
1. Who is most affected by these 2025 inherited IRA rule changes? These rules primarily impact non-spouse beneficiaries (like adult children) who inherited an IRA from someone who was already taking RMDs. If you inherited an IRA from your spouse, you have different, more flexible options.
2. What is the 10-year rule for an inherited IRA? The 10-year rule requires most non-spouse beneficiaries to withdraw all funds from the inherited IRA by the end of the 10th year following the year of the original account holder’s death.
3. Do I have to take withdrawals every year from my inherited IRA? Yes, if the original owner had already started taking RMDs, you will likely need to take annual RMDs from the inherited account starting in 2025, in addition to emptying the account within 10 years. Consulting a financial advisor for personalized advice is highly recommended.
