Inherited IRA rules are changing in 2025 — here’s what beneficiaries need to know

Starting in 2025, certain heirs with inherited individual retirement accounts must take yearly required withdrawals or face a penalty.

But some non-spousal beneficiaries should consider taking distributions sooner, depending on their situation, even if annual withdrawals aren’t required, financial experts explain. 

“This is about multi-year tax planning” to maximize the benefits of an inherited IRA, said Joel Dickson, global head of advice methodology at Vanguard.

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Here’s a breakdown of the upcoming inherited IRA change for 2025 and how heirs can create a tax planning strategy.

Before the Secure Act of 2019, heirs could “stretch” inherited IRA withdrawals over their lifetime, which helped reduce yearly taxes.

But certain accounts inherited since 2020 are subject to the “10-year rule,” meaning IRAs must be empty by the 10th year following the original account owner’s death. The rule applies to heirs who are not a spouse, minor child, disabled, chronically ill or certain trusts.

Since then, there’s been confusion about whether the heirs subject to the 10-year rule needed to take yearly withdrawals, known as required minimum distributions, or RMDs.

“You have a multi-dimensional matrix of outcomes for different inherited IRAs,” Dickson said. It’s important to understand how these rules impact your distribution strategy, he added.

After years of waived penalties, the IRS in July confirmed certain heirs will need to begin yearly RMDs from inherited accounts starting in 2025. The rule applies if the original account owner had reached their RMD age before death.

If you miss yearly RMDs or don’t take enough, there is a 25% penalty on the amount you should have withdrawn. But it’s possible to reduce the penalty to 10% if the RMD is “timely corrected” within two years, according to the IRS.

If you’re subject to the 10-year rule for your inherited IRA, spreading withdrawals evenly over the 10 years reduces taxes for most heirs, according to research released by Vanguard in June.

However, you should also consider “strategic distributions,” according to certified financial planner Judson Meinhart, director of financial planning at Modera Wealth Management in Winston-Salem, North Carolina.

“It starts by understanding what your current marginal tax rate is” and how that could change over the 10-year window, he said.

For example, it could make sense to make withdrawals during lower-tax years, such as years of unemployment or early retirement before receiving Social Security payments. 

However, boosting adjusted gross income can trigger other consequences, such as eligibility for college financial aid, income-driven student loan payments or Medicare Part B and Part D premiums for retirees.