Receiving an inherited IRA can be an emotional experience—often marking the loss of someone you care deeply about. On top of grieving, the IRS has rules you must follow, and recent changes make them even more important.
Previously, non-spouse beneficiaries could stretch withdrawals across their lifetime. But with the original SECURE Act, the IRS introduced the 10-year rule. This gave many beneficiaries just 10 years to empty the account. But here’s the kicker—it was unclear whether you needed to take annual distributions or if you could wait until year 10.
The IRS has finally clarified: Starting in 2025, if you're required to take distributions under the 10-year rule, you must do so annually. Fortunately, the penalty for missing these Required Minimum Distributions—or RMDs—was reduced by SECURE Act 2.0 from 50% to 25%.
But who is subject to the 10-year rule and the requirement for annual distributions? The IRS categorizes beneficiaries into two groups: eligible and non-eligible beneficiaries.
Eligible beneficiaries, including spouses, minor children (until the age of 21), individuals with disabilities, or anyone who is no more than 10 years younger than the original owner, continue to receive favorable treatment. Spouses, for example, can treat the IRA as their own or delay RMDs based on their spouse’s age.
Non-eligible beneficiaries, however, must fully empty the account within 10 years, with annual distributions required each year starting in 2025.
And taxes matter—a lot. Traditional IRAs and 401ks are taxed as ordinary income, and required distributions might push you into a higher tax bracket. Roth IRAs, on the other hand, offer tax-free withdrawals and have fewer restrictions.
There are even more rules when the beneficiary is a trust. Be sure to update your estate plan to ensure it accounts for the treatment of trusts and multi-beneficiary trusts.
So, how do you minimize the tax burden? If you’re planning out how to pass on your wealth, strategies like Roth conversions, careful timing of withdrawals, and Qualified Charitable Contributions can help reduce your taxes. Having more of your retirement nest egg in Roth accounts will reduce the tax burden on your heirs as well.
The bottom line? These rules are complex and carry significant financial implications. Working with professionals like a financial planner and an estate attorney is crucial to avoid costly mistakes.
At NextGen Wealth, we provide comprehensive retirement planning services. We’ll help you navigate difficult decisions and make sure you’re not caught off guard by complicated tax rules.
Are you ready to take control of your retirement? Contact us today to see if we’re a good fit and schedule your financial assessment. Visit our website to learn more about all we offer.
Before you go, don’t forget to like, subscribe, and hit that notification bell so you don’t miss out on more financial planning tips. Thanks for watching!
