Inherited IRA Changes 2025: What Heirs Must Know to Avoid Penalties
Introduction
If you inherited a retirement account, pay close attention: the inherited IRA changes 2025 are now in effect, and missing the updated requirements could bring serious tax penalties. These changes affect how heirs must withdraw funds, how fast the account must be emptied, and how distribution choices can impact taxes. In this guide, we’ll walk you through what’s new, who’s affected, and how to handle an inherited IRA to avoid costly mistakes.
What’s Changing in 2025
Since 2020, many non-spouse beneficiaries of inherited IRAs have been under a “10-year rule,” meaning the account must be emptied within 10 years of the original owner’s death.
Starting in 2025, if the original IRA owner had already reached their required minimum distribution (RMD) age before death, beneficiaries must also take annual required minimum distributions (RMDs) during those 10 years. Missing those yearly withdrawals can trigger a penalty.
The penalty for missed RMDs may be steep — making it crucial for heirs to track and withdraw correctly starting 2025.
Who Is Affected
Most non-spouse beneficiaries, such as adult children inheriting a parent’s IRA.
Beneficiaries of accounts from owners who had already started taking RMDs before death.
Beneficiaries who previously planned to “stretch” distributions over their lifetime — that option is mostly gone now.
Exceptions: Some beneficiaries remain exempt from the new RMD rule — for example, surviving spouses, minor children of the original owner, disabled or chronically ill individuals, and beneficiaries within a certain age range.
Risks & Common Mistakes Under the New Rules
Missing annual RMDs — since 2025 the IRS enforces penalties if you skip required withdrawals.
Waiting until the end of 10 years to withdraw — this can push the entire distribution into one tax year, possibly bumping you into a higher tax bracket.
Lack of planning for estate or beneficiary structure — failing to update beneficiary designations or ignore the new rules could cost heirs significantly.
Smart Withdrawal Strategies for 2025
Plan for annual withdrawals (RMDs) if required — don’t wait until year 10.
Spread withdrawals over multiple years, especially if income is expected to fluctuate — this can smooth out taxable income.
Work with a tax advisor or CPA, especially if you inherit multiple accounts or plan other retirement moves (like conversions).
Check beneficiary designations and timing — make sure you know whether the original owner had started RMDs before passing.
Avoid large lump-sum withdrawals at the end — it may create a tax spike and reduce flexibility.
What You Should Do First If You Inherited an IRA
Confirm when the original owner passed and whether they started RMDs before death.
Contact the account custodian to request required withdrawal schedules for 2025 and beyond.
Run a multi-year tax projection to estimate the impact of withdrawals.
Consult a financial or tax professional to set up the best plan — especially if you have other taxable income or retirement accounts.
Final Thoughts
The 2025 changes to inherited IRAs represent a significant shift in retirement and estate planning. For heirs, it’s critical to understand the new distribution and penalty rules — and act promptly. With careful planning, smart withdrawal strategies, and perhaps professional advice, you can secure your inheritance and avoid unnecessary tax burdens.
If you inherited an IRA, now is the time to review your account and plan your next steps carefully.
by Donald Hayden
As the Co-Founder and CEO of Private Tax Solutions, Don is passionate about assisting small businesses in navigating the intricate landscapes of accounting, taxes, and financial planning. My goal is to help you feel at ease with your finances while maximizing your business’s potential. Let’s transform tax season from a source of stress into an opportunity for growth and make your financial goals achievable!