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Inheriting a personal retirement account is a windfall for many investors.
But little-known changes in 2025 could result in hefty and unexpected penalties, financial experts say.
Starting in 2025, certain heirs who inherit an IRA will be required to make the required withdrawals each year while emptying the account over a 10-year period, known as the “10-year rule.”
“The big change is [for 2025] “The IRS imposes penalties for failing to make required distributions,” said Judson Meinhart, a certified financial planner and director of financial planning at Modera Wealth Management in Winston-Salem, North Carolina. .
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If you miss a required minimum distribution (RMD) from an inherited IRA, there is a 25% penalty. However, if the RMD is “timely amended” within two years, the fee can be reduced. I.R.S..
Here are some important things to know about changing inherited IRAs:
Which heirs may be punished
Starting in 2020, certain inherited accounts are subject to the “10-year rule,'' which means heirs must expend inherited IRAs by the 10th year after the original account owner's death.
After years of waiving penalties for missing RMDs from inherited IRAs, the IRS finalized guidance in July. Starting in 2025, certain beneficiaries will have to make withdrawals every year for a 10-year period. Otherwise, you will be penalized for missing RMDs.
This rule applies to heirs who are not spouses, minor children, disabled, chronically ill, or certain trusts, and is subject to annual tax liability if the original IRA owner reached RMD age before death. withdrawals apply.
One group that could be affected is adult children who inherited IRAs from their parents, said CFP Edward Jastrom, chief planning officer at Heritage Financial Services in Westwood, Massachusetts. .
But the rules have become a “spider-like mess of decision-making,” he says.
Avoiding “10 years of tax pressure”
In 2025, there will be penalties for missing RMDs. But heirs also need to manage withdrawals to avoid “10 years of tax pressure,” Justrem said.
Over the past few years, some heirs have skipped annual withdrawals from inherited IRAs, potentially requiring larger withdrawals before the 10-year period ends. he said.
For example, an increase in adjusted gross income can impact: Medicare Part B and Part D premiums, eligibility for marketplace health insurance premium tax credits, and more.
Of course, the timing of withdrawals from inherited IRAs depends on the complete tax situation, including a multi-year projection of adjusted gross income, Meinhart said.
