Navigating inherited individual retirement accounts (IRAs) has become increasingly challenging for beneficiaries. Recent legislative changes and regulatory updates have introduced new and important tax considerations — especially recent rule changes and delays involving required minimum distributions (RMDs).
These changes have reshaped the financial and tax planning landscape for many who inherit retirement accounts.
Additionally, the IRS recently unveiled long-awaited final rules concerning inherited IRAs. Although these regulations were expected and won't take effect until next year, 2025, they cement key aspects involving RMDs that will impact many beneficiaries. (More on that below).
The clarity in these rules offers opportunities (and maybe some potential pitfalls) for heirs to keep in mind.
So, being aware of these rule changes will help you make informed decisions, optimize your inherited assets and hopefully avoid costly tax mistakes.
With that in mind, here are five essential tax aspects every IRA beneficiary should know.
New Legislation
1. Inherited IRA tax rules have changed
If you have inherited an IRA or have any other retirement plan account, it's important to be aware of the SECURE 2.0 Act.
SECURE 2.0 is legislation that significantly changed U.S. retirement account rules. These changes directly impact retirement savings plans, including 401(k), 403(b), IRA, Roth accounts, and, in some cases, associated tax benefits.
- For example, the minimum age for required minimum distribution (RMD) was raised to 73 under the SECURE 2.0 Act. (Eventually, the RMD age will move to 75.)
Additionally, the SECURE Act of 2019 (which served as a basis for SECURE 2.0) has resulted in many beneficiaries being unable to extend inherited IRA distributions throughout their lifetimes. (More on that later.)
IRS Inherited IRA 10-Year Rule
2. No more ‘stretch IRA’ strategy for many beneficiaries
Before SECURE 2.0, beneficiaries could use a "stretch" strategy with inherited IRA distributions, potentially allowing for tax-deferred growth over a more extended period. However, a "10-year rule" now applies to many beneficiaries of inherited IRAs.
- Due to the original SECURE Act, most beneficiaries can no longer “stretch” distributions over their lifetimes. Instead, many non-spouse beneficiaries who inherited IRAs on or after Jan. 1, 2020, must empty the account within 10 years of the account owner’s death.
- The inherited IRA “10-year rule” has raised concerns about annual RMDs for unsuspecting beneficiaries.
- Update: IRS final regulations on inherited IRAs confirm that beginning in 2025, many beneficiaries will face annual required distributions during the 10 years.
Eligible Designated Beneficiary Categories
For purposes of SECURE, the following are the main categories of "eligible designated beneficiaries" (EDBs), EDBs generally benefit from more flexibility in how they withdraw funds from an inherited IRA.
- Surviving Spouse: Can treat the inherited IRA as their own or take distributions based on their life expectancy
- Minor Children: Applies to children under the age of majority, once they reach adulthood, they must follow the 10-year rule
- Disabled Individuals: Must meet IRS criteria for disability, being unable to engage in substantial gainful activity due to a long-term impairment
- Chronically Ill Individuals: Those who cannot perform at least two activities of daily living without assistance or require supervision due to severe cognitive impairment
- Individuals Not More than 10 Years Younger: Typically siblings, friends or other individual beneficiaries close in age to the account owner
But remember that individual circumstances vary, so consult with a trusted tax advisor to determine how to time your distributions strategically while complying with the 10-year rule if it applies to you.
And keep in mind that the IRS has delayed some rules and penalties for certain inherited IRAs.
IRA RMDs
3. Annual distributions required for some beneficiaries
Under the final IRS rules, issued in mid-July, for some, it's not as simple as waiting until the tenth year to withdraw all the funds in the inherited IRA account.
For many heirs, the IRS now requires annual withdrawals throughout the 10 years. (The RMD amount each year can vary based on several factors, including the beneficiary's age, relationship to the deceased, and the value of the inherited account.)
For example, rules differ depending on whether the original account owner, before they passed away, had begun taking RMDs. If they took required distributions before they died, the beneficiary usually needs to continue taking annual distributions while complying with the 10-year rule (if applicable).
For more information, see IRS Ends Inherited IRA Confusion: Annual RMDs Required for Many Beneficiaries.
4. Inherited IRA RMD penalties are waived
Understanding the tax treatment of distributions and inherited IRA RMD rules is crucial for IRA beneficiaries.
- Inherited IRAs are generally subject to required minimum distributions. Rules vary when the beneficiary qualifies as an “eligible designated beneficiary” (e.g., surviving spouses, minor children, disabled individuals, and individuals who are chronically ill).
- RMD rules, including timing and amounts, for inherited IRAs are largely tied to the date of the original account holder’s death.
It’s important to note that the IRS has delayed implementation of the final rules governing inherited IRA RMDs — until 2025. This means some beneficiaries of inherited IRAs have had more time to adapt to distribution requirements.
The IRS will waive penalties for RMDs missed in 2024 from IRAs inherited in 2023, where the deceased owner was already subject to RMDs. (With previous IRS relief, penalties are waived for missed RMDs from specific IRAs inherited in 2020, 2021, 2022, and 2023.)
However, given all the changes and confusion, it’s a good idea for inherited IRA beneficiaries to consult a tax advisor to determine the correct RMD schedule.
Bottom Line
5. Inherited IRA rules: Individual details matter
With inherited IRAs, the type of account and specifics involving the account holder and the beneficiary matter when determining tax liability and strategy. Knowing these details if you inherited an IRA can help you plan for distributions' tax consequences and choose the best strategy for your situation.
- Consult a qualified tax advisor or financial planner to navigate the specific inherited IRA rules and tax implications.
Inheritance and tax laws can be complex, and individual circumstances vary, so seeking professional guidance can help beneficiaries make informed decisions.
