If you’re leaving an IRA to your heirs or are likely to inherit an IRA in the future, you’ll want to be aware of a change to the rules regarding Required Minimum Distributions (RMDs) for inherited IRAs. A recent article from CNBC, “This inherited IRA rule change for 2025 could trigger a 25% tax penalty,” explains how inherited IRAs could be reduced if you don’t follow the new rules. Beck, Lenox & Stolzer Estate Planning and Elder Law provides this important information on how the Inherited IRA rule change may affect you.
In short, starting in 2025, changes to the rules mandate most non-spousal heirs to take required withdrawals every year in addition to requiring the account be emptied within ten years of inheriting the IRA.
This “10-year rule” applies to most non-spousal heirs. In most cases, this means adult children, especially if the original account owner had reached the age at which they were required to take RMDs themselves.
Most people, even those who are savvy about finances, are unaware of these guidelines and, as a result, don’t take steps to address the changed rules. There are several ways to minimize the impact of these rules. However, they require informed planning.
How you’ll manage these IRA withdrawals will depend in part on which tax bracket you belong to, and which bracket you expect to belong to in the future.
Before the SECURE Act of 2019, inherited IRA distributions could be stretched over the lifetime of the heir, minimizing their impact on income taxes and allowing these retirement accounts to grow over decades. Since 2020, heirs who are not spouses, minor children, disabled individuals, chronically ill individuals, or certain types of trusts have been subject to the ten-year rule. However, there have been questions about whether heirs are required to take yearly RMDs or can make withdrawals at their discretion.
The IRS previously waived penalties for missed RMDs on inherited IRAs. However, those days are now over. If you now inherit an IRA and don’t fall into the exception categories, not only must you empty the account within ten years of inheritance, but you must also take annual RMDs or face the 25% penalty.
If you withdraw the corrected amount within two years of missing the RMD and complete the required form (Form 5329), the IRS might reduce the penalty to 10%, but you’ve still lost 10%. You’ll need a good reason for having missed the RMD, however.
Some heirs have neglected to take the RMDs entirely in recent years, since this requirement wasn’t clear. This means their RMDs and the income taxes due because the RMDs will be larger before the ten-year window closes. Withdrawals from pre-tax accounts are counted as income, so the more strategic you can be about RMDs, the better.
If you plan to leave a large IRA to your heirs, you may want to consider using a Roth IRA and paying taxes when you fund it, to alleviate the tax burden on your heirs. If you anticipate inheriting an IRA, learning how an inherited IRA may affect you will allow you to put a plan in place for how you’ll take withdrawals, ideally in years when your income is lower. Regardless of your current position, it would be prudent to consult with your an experienced planning attorney like the ones at Beck, Lenox & Stolzer about how to plan for the new rules. There are always options, but you’ll want to learn about them before they’re needed. Go onto our website here to schedule a free consultation (new clients only) or you may call our office. As always, existing clients may call into the office to schedule an office consultation with one of our attorneys.
Reference: CNBC (March 24, 2025) “This inherited IRA rule change for 2025 could trigger a 25% tax penalty”
