There is an important update to inherited individual retirement account (IRA) rules that may apply to many non-spouse beneficiaries. The IRS issued final regulations in 2024 that take effect beginning in 2025, and these rules clarify when annual Required Minimum Distributions (RMDs) are required and when an inherited IRA must be fully distributed. For individuals who inherited an IRA from someone who had already begun taking RMDs before their passing, the updated guidance confirms that annual RMDs will now be required during the 10-year period in which the account must be emptied. Beneficiaries who fall into this category will need to begin taking these annual withdrawals in 2025. Those who inherited from someone who had not yet reached their required beginning date still must distribute the entire account within 10 years, but they are not required to take yearly RMDs. Certain beneficiaries, such as surviving spouses, minor children, disabled or chronically ill individuals, and those who are close in age to the original account owner, continue to have different rules and may not be subject to the 10-year timeline.
The IRS has delayed enforcing penalties in earlier years due to uncertainty around implementation, but beginning in 2025, missing a required annual distribution may result in an excise tax of up to 25% of the amount that should have been withdrawn. The IRS does offer a way to correct certain errors, and taking the missed amount and filing Form 5329 could reduce the penalty to 10% if the correction is made in a timely manner.
Our CEO and Senior Wealth Advisor, Marianela Collado, CPA/PFS, CFP®, CDS®, recently discussed these changes in a CNBC article. She noted that taking smaller withdrawals over the years may help individuals manage the tax impact, particularly because a single large withdrawal at the end of the 10-year period may place taxpayers in a higher tax bracket for that year. Marianela also highlighted the importance of monitoring tax law changes introduced in the “One Big Beautiful Bill,” including provisions that phase out certain tax benefits over time, which may influence how and when distributions are taken.
Understanding which rules apply to your situation is an essential first step. Inherited IRA regulations are complex and continue to evolve, and it can be challenging to determine your obligations without reviewing the specifics of your inheritance, the age of the original account owner, and your own beneficiary status. Our team can help you evaluate how the updated rules may apply to you and explore distribution strategies based on your individual circumstances. If you have questions about your inherited IRA or how these changes may affect your planning, we’d be happy to discuss your situation.
Tobias Financial Advisors is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the advisor has attained a particular level of skill or ability. The information presented is believed to be factual and up to date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. It is for information and planning purposes only. Professional advisors, accountants, and licensed attorneys should be consulted before implementing any of the options presented. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. This is a representation of a general case scenario, however individual client timeline and experience may vary due to one’s unique circumstances.
Hyperlinks on this site point to sites beyond this page. We provide these links as a convenience only and disclaim any responsibility for the accuracy of information on those other sites. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change.