If you’ve inherited an individual retirement account (IRA), it’s essential to understand new IRS rules taking effect in 2025.
Beneficiaries must begin taking required minimum distributions (RMDs) from inherited IRAs. Failing to comply could result in penalties of up to (get ready for this) 25 percent of the RMD amount.1
Despite public objections, the IRS is enforcing the 10-year rule for inherited IRAs. For most non-spousal beneficiaries, this means the entire IRA must be emptied by the end of the 10th year, with annual RMDs generally required.
While these changes may seem daunting, there are still effective tax planning strategies that can help reduce your overall tax burden. This article explores key opportunities to help you navigate the new rules and minimize potential pitfalls.
Background: SECURE Act Changes
Prior to the SECURE Act of 2019 and the SECURE 2.0 Act of 2022, beneficiaries could stretch IRA distributions over their life expectancy, a strategy known as the “stretch IRA.” Younger beneficiaries especially benefited from this extended tax deferral.
The two SECURE Acts introduced significant changes:
SECURE Act of 2019
SECURE 2.0 Act of 2022
Understanding the 10-Year Rule
The 10-year rule mandates that most beneficiaries deplete the inherited IRA by the end of the 10th year after the original owner’s death. This 10-year rule applies to all designated beneficiaries whether or not the decedent began taking RMDs.
Failure to take RMDs during the 10-year window can result in penalties, but timely corrections can reduce the penalty from 25 percent to 10 percent. For instance, missing a $10,000 RMD could result in a $2,500 penalty, but fixing the error promptly reduces it to $1,000.
Although the penalties were applicable from 2020 to 2024, the IRS provided transition relief from the penalties (officially called “excise taxes”). But the 25 percent excise tax is in effect starting in 2025.
Special Considerations for Surviving Spouses
Surviving spouses have unique options with inherited IRAs.
1. Assume the IRA as Your Own
2. Elect to Be Treated as a Beneficiary
For Roth IRAs, surviving spouses can assume ownership of the account, avoiding RMDs entirely since Roth IRAs do not require them.6 This allows the account to grow tax-free for life and can be a valuable strategy for transferring wealth to future generations.
Additionally, you might consider converting a taxable IRA to a Roth IRA by assuming ownership as the surviving spouse. This strategy can provide long-term tax benefits.
To avoid the 10 percent early withdrawal penalty when accessing IRA funds before age 59 1/2, consider taking the distribution as a beneficiary rather than through a direct transfer.
If you wish to be treated as a beneficiary rather than the original owner of the IRA, you must begin taking RMDs. Failure to take an RMD following the year of your spouse’s death results in the account being automatically designated in your name rather than naming you as a beneficiary.
Special Rules for Minor Children and Disabled Beneficiaries
The 10-year rule does not immediately apply to minor children. Instead, the clock starts when the child reaches the age of majority (age 21), giving the minor child until the end of the 10th year after majority to fully withdraw the account.
Disabled or chronically ill beneficiaries may be exempt from the 10-year rule indefinitely, so long as they remain disabled.8
Planning Strategies for Other Beneficiaries
If you don’t qualify for any exceptions under the SECURE Act, strategic planning is still essential. Spreading withdrawals evenly over the 10-year period can help you avoid higher tax brackets.
For example, suppose you inherit a $100,000 IRA and are near the 32 percent tax bracket. By withdrawing evenly over 10 years and staying within the 24 percent bracket, you could save upwards of $8,000 in taxes.
Maneuvers. If you expect lower future tax rates, you might delay withdrawals—or you can accelerate them if rates are expected to rise.
Takeaways
Act now. The 10-year rule is in effect for inherited IRAs, and penalties for missed RMDs are real. Planning can help reduce or defer taxes.
Surviving spouses. Carefully choose whether to be treated as the owner or the beneficiary.
Minor children. Know when the 10-year clock starts, and plan for full withdrawal by age 31.
Other beneficiaries. Use timing strategies to balance RMDs and additional withdrawals for tax optimization.
