The rules regarding inherited IRAs have changed in the last five years, and failing to comply with the new requirements may result in IRS penalties. These changes affect people inheriting IRAs and those looking to leave retirement accounts to heirs.
How the SECURE Act Impacted the Retirement Landscape
In 2019, the SECURE Act was signed into law. It was a major piece of retirement legislation that contained important changes to IRAs and other qualified accounts. The intention was to help investors save more and be better prepared for their futures.
Provisions of the Act raised the required minimum distribution (RMD) age, allowed first-time parents to take penalty-free withdrawals from their retirement accounts, and removed the age limit for IRA contributions (provided other requirements are met).
To build on the popular aspects of the original law, Congress passed SECURE 2.0 at the end of 2022. The second law included new RMD dates, increased catch-up contribution limit, and provided new and enhanced rules for small businesses sponsoring retirement accounts.
However, not every aspect of the two SECURE Acts has been positively received, including a new requirement for most non-spousal heirs to deplete inherited IRAs within 10 years. We explain what that means below.
2025 Changes
Under the SECURE Act, most non-spouse beneficiaries who inherited IRAs after January 1, 2020, must fully deplete the account within 10 years of the original account owner’s death. This is known as the 10-year rule, and it replaced the old “stretch IRA” option for many beneficiaries.
However, enforcement of this rule has evolved. From 2020 to 2024, the IRS waived penalties for beneficiaries who didn’t take annual required minimum distributions (RMDs), creating minor confusion about whether RMDs were needed during the 10-year window.
These New Rules Are Now in Effect
Whether or not annual RMDs are required during the 10-year period depends on when the original account owner died:
- If the original owner died before their required beginning date, annual RMDs are not required. You can withdraw funds in any amount, at any time, as long as the account is emptied by the end of the 10th year following their death.
- If the original owner died on or after their required beginning date, you must take annual RMDs in years 1 through 9, based on your own life expectancy, and still fully deplete the account by the end of year 10.
This change reflects the “at least as rapidly” rule of the IRS, which says that if the original account owner had already begun RMDs, those distributions must continue on an annual basis, even for beneficiaries. While the IRS proposed this rule back in 2022, it waived penalties through 2024. But starting this year, missed RMDs can result in penalties.
Remember
This is a complex topic. If you’ve inherited an IRA—especially one from 2020 or later—it’s important to understand how the rules apply to your specific situation. As a financial professional, we help clients navigate these decisions in coordination with their tax, legal, or accounting professional. If you’re not currently working with someone, it may be a good time to connect with a financial professional who can help you understand the impact of required withdrawals on your overall long-term strategy.
Understanding Inherited IRAs
An inherited IRA is an account opened when an heir inherits an IRA or employer-sponsored retirement account after the original owner dies. The beneficiary inheriting the IRA may be an individual, such as a spouse, relative, or unrelated party. It can also be an entity, like a charity or an estate.
A beneficiary will typically open an inherited IRA with the proceeds from traditional, Roth, rollover, SEP, and SIMPLE IRAs, or an employer-sponsored account like a 401(k). Proceeds must generally be transferred into a new inherited IRA in the beneficiary’s name within 60 days. You must open an inherited IRA even if you intend to take a lump-sum distribution.
Who Will the New Rules Affect
To understand the inherited RIA rules, it’s critical to know which type of beneficiary you or your heirs fall into:
Suppose you are an Eligible Designated Beneficiary (EDB). In that case, you are exempt from the new 10-year rule and are allowed to continue using a “lifetime stretch,” where you can satisfy RMDs as long as you live or until the assets run out.
EDBs include:
- The surviving spouse
- Minor children of the original account holder (until the age of majority)
- Individuals with disabilities or chronic illnesses
- Beneficiaries who are less than 10 years younger than the decedent
If you are a Non-Eligible Designated Beneficiary (NEDB), you must take annual withdrawals that deplete the inherited IRA per the 10-year rule.
NEDBs include:
- Adult children
- Grandchildren
- Friends or more distant relatives
- Charities, businesses, trusts, and estates
Why the Rule Changes Matter in 2025 and Beyond
The updates to the inherited IRA rules have real-world tax and estate consequences that need to be considered if you are a beneficiary or looking to pass on qualified assets as part of your legacy.
- Increased Taxable Income:
These annual RMD requirements can lead to unexpected tax consequences as withdrawals are typically taxable to you as ordinary income.
If you are inheriting a sizable account, the tax burden of these mandatory withdrawals could move you into a higher tax bracket, trigger a payment of the net investment income tax, or, if you are older, result in a tax on Social Security and Medicare premium surcharge that applies to high earners.
- Estate Strategy Complexity:
If one of your intentions in creating an estate strategy was to provide your adult children, or others, with a pool of assets that they could stretch over their life expectancy, while allowing the remaining balance to potentially grow tax-deferred in an inherited IRA, the SECURE Act changed that.
Under the old rules, younger beneficiaries typically benefited the most, as longer life expectancies meant lower annual RMDs. That made inherited IRAs an attractive element of an estate strategy. Since most beneficiaries must now withdraw the account balance within 10 years, you may want to speak with a financial professional about adjusting your legacy intentions.
What You Can Do Now
Whether you’re an account owner considering your estate or a beneficiary who has inherited (or will inherit) an account after 2020, there are several things to consider.
For Current Account Owners:
- Review your beneficiaries periodically. Life events, like births, divorces, and deaths, should be reflected in your designations. You should also know whether a beneficiary is an EDB, like a spouse, who qualifies for lifetime stretch treatment.
- For certain account owners, a Roth conversion may be appropriate. If your heirs will face large taxable RMDs, converting some funds to a Roth IRA and paying the taxes before you pass might be an option.
- You may want to explore charitable giving strategies from your IRA or naming charities as beneficiaries.
- Leaving retirement assets to a trust rather than directly to a beneficiary may make sense for some individuals. This is especially true if you are concerned that your beneficiary, upon inheriting your accounts, might mismanage the funds.
- A trust allows you to include language directing when and how the assets can be distributed. Remember, using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the relevant rules and regulations.
- Talk with your financial professional and estate attorney, as these changes may involve updates to your trust, will, or overall financial and estate strategy.
For Beneficiaries:
- If you have, or are about to, inherit an IRA or other qualified account, you should determine which rules apply to you. Being a spouse, an EDB, or an NEDB has different implications.
- Start thinking about your withdrawal approach now, so you understand the tax consequences.
Common Inherited IRA Misunderstandings
The two SECURE Acts have added increased complexity (and even outright confusion) to the withdrawal requirements and tax treatment of inherited IRAs. Individuals may still get tripped up on the details even with finalized IRS rules.
Here are a few key myths to clarify:
- Myth: “I can just wait until year 10 to withdraw everything from my inherited IRA.”
Reality: Not precisely. It’s going to depend on your situation. - Myth: “Spouses can’t stretch IRAs anymore either.”
Reality: Not true. Spouses are still allowed to stretch distributions over their lifetimes. - Myth: “I inherited an IRA after 2020 and haven’t made any RMDs. I still have 10 years to deplete the account.”
Reality: It’s going to depend on your situation. While the IRS did not enforce the new inherited IRA RMD rules over the past four years, they are in effect now. Anyone who inherited an IRA after 2020 has to start taking annual RMDs in 2025 and deplete the account within 10 years of the original owner’s death. - Myth: “I don’t have to think about these changes unless I inherit an IRA.”
Reality: Yes and no. The changes may not impact you directly, but if you have an IRA or other qualified account that will be part of your estate, you will want to consider what’s best for your heirs and legacy.
Conclusion
Whether you’re looking to leave retirement assets or expect to inherit them, understanding how the 2025 changes apply to your situation is key. But you don’t have to navigate the uncertainties on your own. Let’s have a conversation.
Before We Go
We discussed many concepts and ideas, so we wanted to take a moment to explain the rules and restrictions for certain types of accounts.
Once you reach age 73, you must begin taking RMDs from a traditional IRA in most circumstances. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
Similarly, once you reach age 73, you must begin taking required minimum distributions from a SEP-IRA and other defined contribution plans. Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73. Withdrawals from your 401(k) are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.
To qualify for tax-free and penalty-free earnings withdrawals, Roth IRA distributions must meet a 5-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be taken under certain other circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.
The topic is complex, so while we will give you an overview in the article, if you have an inherited IRA, especially one from 2020 or later, you may want to consult your financial professional to review your situation. This article is for informational purposes only and is not a replacement for real-life advice. Consult your tax, legal, and accounting professionals before modifying your tax strategy.
Sources:
1. Investopedia, February 01, 2025
https://www.investopedia.com/secure-act-4688468
2. T. Rowe Price, March 2025,
https://www.troweprice.com/en/us/insights/secure-2-0-act-cheat-sheet
3. U.S. News & World Report, December 12, 2024
https://money.usnews.com/money/retirement/401ks/articles/new-rmd-rules
4. Investopedia, September 9, 2024
https://www.investopedia.com/terms/i/inherited_ira.asp
5. Fidelity, April 22, 2025
https://www.fidelity.com/viewpoints/wealth-management/insights/iras-left-to-a-trust