There’s been a shift in how inherited individual retirement account (IRA) rules are handled. If you’re one of the designated heirs, you now may need to make certain annual withdrawals—or else the IRS could come knocking with penalties.
From 2025 onwards, specific beneficiaries are required to withdraw each year from their inherited IRAs, which must be fully depleted over a decade, as laid out in the finalized regulations this past July.
The so-called "10-year rule" targets most non-spouse heirs—often adult children—if the previous IRA holder had already reached the age for required minimum distributions (RMDs) before passing away.
Although this regulation has been set, many investors find themselves in the dark about it. "People just don’t know enough about these changes," says Catherine Valega, a certified financial planner and founder of Green Bee Advisory near Boston.
See also: April 1 is the last date for some retirees to avoid a 25% tax fee. Plus, tariffs naturally increase costs, a point backed by economists, and the Fed’s decision to keep interest rates unchanged has implications for your cash flow.
Despite the rule, experts suggest heirs should still consider strategically timing IRA withdrawals based on yearly tax brackets, possibly even speeding up the process of emptying these accounts.
Here’s the essentials you need about the new adjustments for inherited IRAs.
Who Might Be Penalized by the IRS
According to Denise Appleby, an IRA specialist and CEO of Appleby Retirement Consulting in Georgia, there’s been much confusion over which heirs must make these RMDs with inherited IRAs.
Before the Secure Act of 2019, heirs could spread out withdrawals from inherited accounts across their lifetimes to minimize taxes each year.
Since 2020, the 10-year withdrawal rule has been applicable to heirs who are neither a spouse, minor child, nor those who are disabled or chronically ill, or belong to certain trusts. Yet, until last year’s IRS directive, it was unclear if yearly RMDs during the 10-year timeline were mandatory.
If the original account holder was of the age to take RMDs before their death, heirs must also comply, Appleby explained.
Previously, penalties for missed RMDs from inherited IRAs were forgiven by the IRS. However, failing to initiate these annual withdrawals by 2025 could result in a 25% penalty. Nonetheless, this fee may potentially be reduced to 10% if the correct amount is withdrawn within two years by submitting Form 5329. Sometimes, the penalty could be waived altogether.
"Many clients have had the excise tax waived," says Appleby, after rectifying the RMD and providing a solid reason on their form.
Why Taking Money Out Earlier Could Be Beneficial
Experts agree that while penalties loom for missed RMDs post-2025, some heirs should preemptively drain inherited accounts.
Some have neglected to make annual withdrawals from inherited IRAs, which could mean steeper RMDs down the line as the 10-year deadline closes. Such pre-tax withdrawals are taxed as ordinary income.
"The sooner you start, the smarter it is," advises CFP Scott Bishop, partner and managing director at Presidio Wealth Partners in Houston. “Chipping away at it earlier is advantageous.”
Financial advisors often project taxes over several years and determine IRA withdrawals during periods of lower income.
