Now that 2025 is here, the new rules for inherited Individual Retirement Accounts (IRAs) are fully in effect. These changes, stemming from the SECURE Act and recent IRS regulations, significantly impact how beneficiaries must manage and withdraw funds from inherited retirement accounts. If you’ve inherited an IRA, it’s essential to understand these rules to avoid penalties and make informed financial decisions.

The 10-Year Rule is Now in Full Effect

As of January 1, 2025, the “10-year rule” applies to most non-spouse beneficiaries of inherited IRAs. This rule requires that the entire balance of the inherited IRA be fully withdrawn within 10 years of the original account owner’s death.

Key Points:

• Applies to IRAs inherited from account owners who passed away on or after January 1, 2020
• Eliminates the “stretch IRA” strategy for most beneficiaries, meaning distributions can no longer be spread over a lifetime
• Exceptions exist for certain “eligible designated beneficiaries”

Learn more about managing your IRA effectively

Annual RMDs Are Now Required

A major change in 2025 is the requirement for annual Required Minimum Distributions (RMDs) during the 10-year withdrawal period. Previously, beneficiaries could wait until year 10 to withdraw funds, but now they must take annual distributions.

New RMD Requirements:

• Non-eligible designated beneficiaries must take yearly withdrawals starting in 2025
• Failure to take RMDs will result in a 25% penalty on the amount not distributed

Understanding Required Minimum Distributions

Exceptions to the Rule

Some beneficiaries—known as eligible designated beneficiaries—can still use the life expectancy method for distributions, rather than following the strict 10-year rule. These include:

• Surviving spouses
• Disabled or chronically ill individuals
• Individuals less than 10 years younger than the original account owner
• Minor children of the account owner (until they reach the age of majority)

Not sure if you qualify for an exception? Contact us today for a consultation.

Special Considerations for Roth IRAs

The rules differ slightly for inherited Roth IRAs:

• No annual RMDs are required during the 10-year period
• The entire account must still be distributed by the end of the 10th year following the year of inheritance
• Qualified withdrawals remain tax-free, preserving the tax advantage of the Roth IRA

Pros and Cons of Roth IRA Conversions

What Beneficiaries Should Do Now

With these new rules now in place, it’s important to review your inheritance and withdrawal strategy:

• Understand your beneficiary status and how these rules apply to you
• Consider the tax implications of annual withdrawals versus taking larger distributions later
• Plan for potential increases in taxable income
• Work with a financial advisor to develop an optimal withdrawal strategy

Schedule a consultation with Oakmont Advisory Group today to ensure your financial plan aligns with these new regulations.

Final Thoughts

The new inherited IRA rules bring both challenges and opportunities for beneficiaries. By understanding the regulations and taking proactive steps, you can ensure your inherited retirement assets are managed efficiently while minimizing taxes and avoiding penalties.

• Have questions? Contact Oakmont Advisory Group today for expert financial guidance.
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