If you have inherited (or may someday inherit) an individual retirement account (IRA), the 2025 changes may significantly impact your tax planning.
RMD requirements.
Starting in 2025, annual required minimum distributions (RMDs) are mandatory for most inherited IRAs. Failure to comply may result in penalties of up to 25 percent, which can be reduced to 10 percent if corrected promptly. Generally, under the Secure Act 2.0 you have until the end of the second tax year following the year the RMD was missed to fix the error.
10-year rule enforcement. The 10-year rule mandates that most non-spousal beneficiaries deplete the inherited IRA by the end of the 10th year after the original owner’s death, with annual RMDs generally required. This 10-year rule applies to all designated beneficiaries, whether or not the decedent began taking RMDs. Failure to take RMDs during the 10-year window can result in penalties, but timely corrections can reduce the penalty from 25 percent to 10 percent.
For example, missing a $10,000 RMD could result in a $2,500 penalty. However, if the taxpayer promptly distributes the missed RMD, the penalty reduces to $1,000. Although the penalties were applicable from 2020 to 2024, the IRS provided transition relief from them. However, starting this year (2025), the penalty will be 25%.
Spouses and Special Cases
Surviving spouses
Surviving spouses have the option to assume ownership of the IRA or withdraw from it as a beneficiary. Roth IRAs offer additional flexibility, allowing for tax-free growth without RMDs.
When spouses inherit an IRA, they can either be treated as the beneficiary (with specific distribution rules) or assume ownership, allowing them to treat the IRA as their own with standard IRA rules. As a beneficiary, they can choose when to begin taking RMDs, potentially delaying them until the owner’s RMD age or the year after their death. As the owner, they can roll the IRA into their existing or new IRA, enjoying tax-deferred growth, but will be subject to the same distribution rules as if they were the original owner.
If a spouse wishes beneficiary status for an IRA, they must start taking RMDs in the year following their spouse’s death. If they fail to do so, then the IRS will consider the IRA to be owned by the beneficiary spouse.
Minor children
Minor children have until age 31 to deplete the account, with the 10-year rule beginning at age 21. In other words, the 10-year countdown will not start until the minor reaches age 21.
Disabled beneficiaries
Disabled beneficiaries may be exempt from the 10-year rule indefinitely, assuming they remain to be disabled.
Planning Strategies
Strategic withdrawals can help you avoid higher tax brackets. For example, spreading withdrawals evenly over 10 years can minimize tax impact. You also have the option to accelerate or reduce annual withdrawals based on your expectation of changes in your future yearly income and tax rates.