An inherited individual retirement account (IRA) is a potential financial windfall that may create new opportunities to achieve your financial goals. If you are a beneficiary currently or expect to be one in the future, you should know recent legal changes on inherited IRAs can result in costly implications if not followed properly. The Internal Revenue Service (IRS) has clarified rules included in the SECURE Act (which Congress passed in 2019) that are important for IRA beneficiaries to understand. Read on to determine if these new rules are applicable to your situation.
Different beneficiaries have different rules. Spouse beneficiaries will ultimately have much more flexibility with how they utilize an inherited IRA. Spouses can spread withdrawals from the account over their lifetime or roll the funds into their own IRA. For most other beneficiaries, such as children or grandchildren, the rules are more rigid.
Non-spouse beneficiaries inheriting an IRA between 2020 and 2024 were required to withdraw all assets from the account within 10 years of the original account owner’s death.
2025’s new, more stringent rules. Those who inherit an IRA beginning in 2025 face more restrictions. In most cases, non-spouse beneficiaries must take annual IRA distributions from the inherited account. The annual distribution requirement applies if the account was inherited from an IRA owner who already reached the required minimum distribution (RMD) age before death, which under current law is age 73.
Annual distributions are determined using the IRS life expectancy calculation tables. The distribution must, at a minimum, equal this calculated distribution amount. The beneficiary can take larger distributions, but annual minimum withdrawal requirements must be met for the first nine years. In year 10, the balance of the IRA must be distributed. Failure to withdraw at least the minimum amount can result in a penalty equal to 25% of the under-distributed amount. For example, if you are required to withdraw $20,000 from the inherited IRA, but only took a $10,000 distribution, you could be subject to a $2,500 penalty.
If the account was inherited from an owner who did not yet reach RMD age, the beneficiary still has 10 years to withdraw all the money. The beneficiary will also have the choice to determine how much and how often to do so. In addition, the new more stringent rules don’t apply to beneficiaries who are minor children, have a disability or chronic illness, or for IRAs held in certain trusts. If these exceptions are met, beneficiaries can “stretch” inherited IRA withdrawals over their lifetime. To determine if your inherited IRA is subject to new distribution rules, contact a financial adviser and tax professional.
Planning is even more critical. Withdrawals from an inherited traditional IRA result in more taxable income. Consider the financial and tax implications of your withdrawal strategy, including whether the distributions will change your tax bracket. Distributions could mean your income reaches thresholds that result in increased taxes, higher premiums for Marketplace health insurance coverage under the Affordable Care Act, or a higher tier for Medicare Part B and D premiums.
Contact your financial adviser to discuss the impact of an IRA you’ve already inherited or expect to in the future. With these 2025 rules, it’s vital to align IRA distributions with long-term goals, ensuring these assets support a meaningful financial legacy for future generations while avoiding common pitfalls in estate and tax planning.
Chris Thompson, CFP ®, CMFA ®, CRP is a Private Wealth Advisor and Managing Director with Upper Deck Wealth Management a private wealth advisory practice of Ameriprise Financial Services, LLC. in Ponte Vedra Beach FL. He specializes in fee-based financial planning and asset management strategies and has been in practice for 33 years. To contact him, www.ameripriseadvisors.com/team/upper-deck-wealth-management, 904-380-2323, 818 A1A N, Suite 301, Ponte Vedra, FL 32082.
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