New Inherited IRA Rules 2025

The long overdue final rules and regulations for those who have inherited IRA funds post January 1st, 2020, have now been released by the IRS. These finalized regulations are intended to provide more clarity to what has been referenced as the “10-year rule” for inherited required minimum distributions.

Current Inherited IRA Rules

Back in 2019, the SECURE Act was enacted. It specified that most beneficiaries, excluding surviving spouses, are mandated to withdraw the full balance of an inherited IRA or defined contribution plan within 10 years following the original account owner’s death. Then in February 2022, the IRS proposed new regulations that would impact all these same beneficiaries.

The Proposed Regulations

Age When RMDs Begin

• 73 for anyone who reached that age on or after Jan. 1, 2023
• 72 for anyone who reached that age between Jan. 1, 2020, and Dec. 31, 2022
• 70½ for anyone who reached that age before Dec. 31, 2019

Designated beneficiaries must take the RMDs in years 1 through 9 after the decedent’s passing if their required minimum distributions (RMD) had begun. Then in the 10th year the remainder would be distributed completely. Up until this point the common consensus was that a beneficiary solely had to have the account depleted by the end of the 10th year. This provided flexibility for the beneficiary to pick and choose when to realize the taxable income. This proposed regulation of annual RMDs significantly limits tax planning options and could elevate a beneficiary’s tax liabilities.

This proposal caused a lot of confusion for those who had recently inherited an IRA or defined contribution plan. It also created a lot of potential risk for them and even the administrators of these retirement plans.

Why is this so concerning for beneficiaries? Well, RMDs can be subject to a 50% excise tax penalty if a taxpayer does not satisfy their requirements by year end!

Response to Proposed Regulations

Just six months after the proposed regulations were announced, the IRS rolled back. They decided to not enforce these penalties on those who failed to take RMDs once the SECURE Act had been enacted in 2020. Recently, the IRS continued to expand this relief to include RMDs for 2024. So, taxpayers who inherited IRA or defined contribution funds from 2020 to 2024 were not subject to an annual RMD.

New Inherited IRA Rules Starting 2025

What started off as a proposal in 2022 will officially be the law in 2025. As of January 1st, 2025, certain beneficiaries must take annual RMDs over the 10 years following the death of the account holder.

If the deceased had not yet begun taking RMDs, the rules would change slightly. While the account still needs to be fully distributed within the same 10-year timeframe, no annual distributions are mandated. This allows beneficiaries greater flexibility for tax planning.

For example, in 2022 Penny inherited an IRA from her mother who had already begun taking RMDs. Thanks to the waivers by the IRS, Penny does not need to take RMDs for 2023 or 2024. However, under the final regulations, she will need to take annual RMDs from 2025 through 2031 while ensuring the account is liquidated by 2032.

On the flipside, let’s say Penny’s mother had not started her RMDs. Penny would then have the option to refrain from distributions between 2025 and 2031. The account just needs to be fully liquidated by the end of 2032.

Here is an easy-to-follow guide for you to download for reference:

Need Help?

If you’ve inherited an IRA or defined contribution plan since 2020 and have questions about the applicable RMD rules, please reach out to us. We can assist you in determining your distribution timeline and suggest strategies that may help you reduce your tax burden.

Resources

SECURE Act 2.0: Catch-up Contribution Rules

2025 How Must I Take Distributions from The IRA I Inherited?