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Inheriting money is often welcome, but if it’s a retirement account, beneficiaries need to be aware of the new rules that go into effect in 2025, or they could end up paying steep penalties to the IRS.
New rules for inherited individual retirement accounts (IRAs) (both traditional and Roth) were passed in 2019, but the IRS gave Americans a grace period from 2020 to 2024 as the law takes shape. The agency issued the final regulations in July 2024. In other words, the law came into effect last year for retirement accounts that will be carried over from 2020 onwards.
If Americans aren’t careful, they could face a 25% fine or tax bomb in a few years.
“There are a lot of things people need to know when inheriting an IRA,” says Mark Steber, chief tax information officer at tax preparation firm Jackson Hewitt. “Perhaps most importantly, understand that sooner or later you will have to pay taxes on the money you inherit.”
What are the rules regarding inherited IRAs?
10 year rule: You must empty an inherited individual retirement account (IRA) within 10 years, even if it’s a Roth IRA, unless you are a surviving spouse, minor child, disabled or chronically ill, or less than 10 years older than the retirement account owner.
Minimum distribution required, or RMD: If the original owner of a traditional IRA account started taking RMDs each year, you will also need to continue taking annual withdrawals. RMDs must be taken by the end of the calendar year, so 2025 distributions must be made by December 31, 2025. If the original owner did not initiate taking RMDs, the beneficiary also does not have to take RMDs each year.
Roth IRAs do not require RMDs, so your beneficiaries are not required to receive any RMDs.
What happens if I miss my RMD?
According to the IRS, missed RMDs can result in penalties of 25% of the amount that was supposed to be withdrawn. The IRS said the penalty could be reduced to 10% “if the RMD is timely corrected within two years.”
So, if you forgot or didn’t know you needed to take an RMD by the end of last year, officials say you should do so as soon as possible and file Form 5329, Additional Tax on Qualified Plans (Including IRAs) and Other Preferred Accounts, on your 2025 federal tax return.
How are inherited retirement accounts taxed?
- Amounts withdrawn from an inherited traditional IRA (including RMDs) are taxed as ordinary income. RMDs can push beneficiaries into higher tax rates, especially if multiple years’ worth of withdrawals are required in a short period of time.
- There are no taxes or RMDs on inherited Roth IRA distributions as long as the account has been open for at least five years.
Can I withdraw more than the RMD amount?
Heirs can withdraw more than the required amount each year.
Vanguard encourages most beneficiaries to make equal distributions over a 10-year period before liquidation, “taking advantage of lower tax brackets each year and avoiding creeping into higher tax brackets. The overall tax differential is meaningful while also allowing for some continued tax-deferred growth,” the investment management firm said in the study.
Taking only the minimum amount each year and increasing the balloon balance at the end to meet the 10-year limit means that more of the IRA funds could end up being taxed at a higher rate.
According to Vanguard, there are exceptions, including:
- Taxpayers already in the highest tax bracket may not have the opportunity to pay a lower rate.
- If your income fluctuates, you may want to time your larger withdrawals in years when your funds are low. “If you know you’re going to get a big bonus in 2026, you might not take a distribution that year,” Jonathan Fishburn, a tax and real estate expert in the nonprofit TIAA’s wealth planning strategy group, said in a blog post. “If you know you can’t get it, maybe you can.”
- Consider whether your increased income will affect your eligibility for certain tax credits, tax credits, student loans, or increase your Medicare costs through income-related monthly adjustments.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
