When someone inherits an Individual Retirement Account (IRA), they need to understand certain rules to avoid unexpected tax bills.
Recent updates to the rules, especially with the introduction of the SECURE Act 2.0, change how beneficiaries handle these accounts.
Here’s a simplified guide to the current rules and upcoming changes in 2025, including the ten-year rule and required minimum distributions (RMDs).
What Is the Ten-Year Rule for Inherited IRAs?
With the original SECURE Act of 2019, beneficiaries of IRAs from 2020 onward had ten years to empty the account.
This meant they could spread out payments over ten years, which could help reduce taxes by avoiding one large, lump-sum distribution.
However, some beneficiaries, like spouses or certain eligible family members, are still allowed to stretch their payments based on their life expectancy instead of the ten-year rule.
SECURE Act 2.0 and Upcoming 2025 Changes
Starting in 2025, new guidelines will clarify and expand on the ten-year rule. Here’s what you need to know:
- Yearly Required Minimum Distributions (RMDs): Starting in 2025, beneficiaries who follow the ten-year rule will need to take out minimum annual distributions, rather than waiting until the tenth year.
- Penalties for Missed RMDs: If beneficiaries miss an annual RMD, they may face taxes on the missed amount and a penalty of 25%. If corrected quickly, the penalty can be reduced to 10%.
- Spouse Beneficiaries’ Flexibility: Spouses who inherit IRAs have options to follow their own schedule. They can delay distributions, take payments based on their life expectancy, or roll the account into their own IRA.
Special Cases: Eligible Designated Beneficiaries
Certain beneficiaries, such as minor children of the deceased, spouses, and beneficiaries with disabilities, may follow different rules.
They can take distributions based on either their life expectancy or the deceased’s, avoiding the ten-year rule if desired.
Key Takeaways for IRA Beneficiaries
Understanding these rules and planning withdrawals carefully can help avoid unnecessary taxes and penalties. Beneficiaries should consult with financial advisors to ensure they meet RMD requirements and choose the best withdrawal plan.
1. What is the new ten-year rule for inherited IRAs?
The ten-year rule requires most IRA beneficiaries to empty the account within ten years of inheriting it. This will be updated in 2025 to require annual minimum distributions.
2. Who can skip the ten-year rule?
Spouses, minor children, and disabled beneficiaries may be able to skip the ten-year rule and take distributions based on their or the deceased’s life expectancy.
3. What happens if I miss a required withdrawal?
Starting in 2025, missing a required minimum distribution will result in a tax penalty of 25%, which can drop to 10% if fixed promptly.
4. How do spousal beneficiaries handle an inherited IRA?
Spouses can transfer the account to their own IRA, delay distributions, or choose the ten-year rule depending on their circumstances.
5. Do minor children need to follow the ten-year rule?
No, minor children can take distributions based on life expectancy until they reach adulthood, after which the ten-year rule applies.
