Inherited IRAs: A Windfall or a Costly Surprise?
New Rules for 2025: What You Need to Know
Inheriting an individual retirement account (IRA) can be a significant financial gain, but changes taking effect in 2025 may bring unexpected penalties for some beneficiaries. Financial experts warn that certain heirs must navigate a complex web of rules to avoid costly surprises.
The 10-Year Rule: A New Era for Inherited IRAs
Before 2020, heirs could withdraw funds from inherited IRAs over their lifetime, reducing yearly income taxes. However, the Secure Act of 2019 introduced the “10-year rule,” requiring heirs to deplete inherited IRAs within 10 years of the original account owner’s death. Now, starting in 2025, certain beneficiaries must take yearly withdrawals during this 10-year window or face penalties for missed required minimum distributions (RMDs).
Who’s Affected and What’s at Stake
The new rules apply to heirs who are not a spouse, minor child, disabled, chronically ill, or certain trusts. If the original IRA owner had reached their RMD age before death, the yearly withdrawals apply. Adult children who inherited IRAs from their parents are particularly impacted, according to certified financial planner Edward Jastrem.
Penalties and Consequences
Missing an RMD can result in a 25% penalty, but timely correction within two years can reduce the fee. However, the IRS has finalized guidance, and starting in 2025, certain beneficiaries must take yearly withdrawals to avoid penalties. Failing to do so can lead to a “10-year tax squeeze,” where larger required withdrawals are needed before the 10-year window closes.
Managing Withdrawals and Taxes
Heirs must carefully manage withdrawals to avoid boosting adjusted gross income, which can impact Medicare Part B and Part D premiums, eligibility for the premium tax credit, and more. Timing inherited IRA withdrawals depends on individual tax situations, including multi-year projections of adjusted gross income.
Expert Insights and Next Steps
Certified financial planners Judson Meinhart and Edward Jastrem emphasize the importance of understanding the new rules and seeking professional guidance to navigate the complex landscape of inherited IRAs. With careful planning, beneficiaries can minimize penalties and maximize their inheritance.
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