Inherited IRA Must Do in 2025


IRA, Roth IRA


January 30, 2025

If you inherited an IRA from someone who passed away in 2020 or later, an important new IRS rule has kicked in beginning in 2025 that you need to pay attention to.

 

Ever since 2020, there has been a 10-year time limit for how long many people can keep an inherited IRA. By the end of the 10th year, you have to have withdrawn all the money, which is different than the old rules that allowed someone who inherited an IRA to let it grow for decades if they wanted, as long as they took the annual required minimum distributions (RMDs) based on their age.

 

There has been a lot of confusion about whether people subject to the new 10-year rule also need to take annual RMDs until they have emptied their inherited IRA.

 

The answer is yes. Beginning in 2025, if you inherited an IRA from someone who passed in 2020 or later, you likely need to take an RMD this year, and every year until you have withdrawn all the money from the IRA.

 

There are lots of ins and outs to this, so let’s review it together.

 

Who do the new Inherited IRA rules apply to?

 

As I mentioned, IRAs inherited from someone who died in 2020 or later, are subject to the new withdrawal rules.

 

There are a few important exceptions to who must follow the new rules.

You do not need to follow the new rules explained below if the beneficiary is:

  • The surviving spouse
  • A child under the age of 21.
  • No more than 10 years younger than the deceased.
  • Disabled or chronically ill.

 

If any of those exceptions apply, you have more options in the timing of withdrawals from an Inherited IRA. I recommend consulting with a trusted tax pro for advice.

 

What follows are rules for everyone else, who must follow the new 10-year withdrawal rule.

 

You must withdraw 100% of the Inherited IRA within 10 years.

Actually, it’s more like 11 years, not 10. The rule is that you must have 100% withdrawn no later than the 10th year after the year the deceased died.

 

Missing an annual Inherited IRA RMD will trigger a 25% penalty.

If you fail to meet the annual RMD rules for an inherited IRA, you may owe an IRS penalty equal to 25% of what your RMD should have been.

 

Yes, even an inherited Roth IRA must be emptied out within the 10-year rule.

This 10-year rule applies to both inherited Traditional and Roth IRAs. You will owe income tax on every dollar you withdraw from a Traditional IRA. You will not owe any income tax on withdrawals from Roth IRAs, but you still must make the withdrawal. This effectively means the money currently in a Roth IRA is no longer able to grow tax-deferred.

 

You can withdraw the money faster if you want.

I want to be very clear, the minute you inherit an IRA the money is 100% yours, and you can do whatever you want. If you want to withdraw the money faster, you can.

But if you want the money to stay inside the IRA for the full 10 years, you still must make an RMD every year beginning in 2025 and until you reach your 10-year limit. (The IRS has waived the need to make any retroactive RMDs for 2021, 2022, 2023, and 2024. It is only starting this year that the annual RMD for everyone following the 10-year rule applies.)

 

Be tax-smart if it’s a traditional inherited IRA.

If you don’t need the money right now and are inclined to keep it growing inside the IRA as long as possible, you need to be tax-smart. Remember, if it’s a Traditional IRA every dollar withdrawn will be taxed as ordinary income in the year it is withdrawn. If you wait to withdraw all or most of it in year 10 (other than your required annual RMDs) it could send your taxable income high enough to bump you into a higher tax rate. It may make more sense to spread out withdrawals over a few years. A trusted tax pro can help you figure out the best strategy for each year between now and the end of your 10-year withdrawal time frame.

 

Your brokerage will be able to calculate your RMD for you.

The firm where you have the inherited IRA should have an online tool to help you calculate your 2025 RMD.

 

Preplan how you will use your RMD.

You can of course spend it. Or save it. Or invest it. You know my advice will be to make a choice that helps you build financial security. Make those choices: You don’t need to use every withdrawn dollar for one thing. You can use the money for a mix of saving and investing. And yes, if you want to spend some today, that’s always an option. I only ask that you stand in your truth, and be sure to make choices that build financial freedom for years and decades to come.

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