Starting in 2025, certain heirs with inherited individual retirement accounts (IRAs) must take required withdrawals every year or face an IRS penalty. This new rule covers most non-spouse beneficiaries if the original IRA owner reached the required minimum distribution (RMD) age before their death. “The major change for 2025 is that the IRS is enforcing penalties for missing required distributions,” explained certified financial planner Judson Meinhart, director of financial planning at Modera Wealth Management in Winston-Salem, North Carolina.
The penalty for missing an RMD from an inherited IRA is 25%, but this fee may be reduced if the mistake is corrected within two years. Prior to the Secure Act of 2019, heirs could withdraw funds from inherited IRAs over their lifetime, which spread out the tax liability. However, the 10-year rule introduced in 2020 changed this, necessitating that certain inherited accounts be fully withdrawn within ten years.
The IRS will begin enforcing the penalty for missed RMDs from these accounts starting in 2025. The rule specifically impacts heirs who are not a spouse, minor child, disabled, chronically ill, or certain trusts.
Penalty for missed inherited IRA withdrawals
The yearly withdrawals need to be taken if the original IRA owner had reached their RMD age before passing away. According to Edward Jastrem, the changes make it crucial for affected heirs, such as adult children who inherit IRAs from their parents, to navigate the complex decision-making process involved. To avoid the “10-year tax squeeze,” heirs need to carefully manage their withdrawals.
Missing yearly withdrawals could result in larger required amounts during the remaining years before the 10-year deadline. These larger withdrawals can significantly boost adjusted gross income, affecting factors like Medicare Part B and Part D premiums, eligibility for Marketplace health insurance, and more. “The timing of inherited IRA withdrawals should depend on your overall tax situation, including multi-year projections of your adjusted gross income,” Meinhart advised.
In conclusion, the upcoming rule change creates new challenges for heirs managing inherited IRAs. Understanding and planning for these requirements is essential to avoid costly penalties and manage tax impact effectively.