Starting in 2025, the IRS has finalized new guidance around inherited IRAs that’s especially important for non-spouse beneficiaries. If you've inherited a traditional IRA from someone who had already begun taking required minimum distributions (RMDs), you’ll now be expected to take annual RMDs based on your own life expectancy—even if the entire account still must be emptied within 10 years.
What’s Changed?
The SECURE Act of 2019 introduced the "10-year rule," which requires most non-spouse beneficiaries to fully distribute an inherited IRA within 10 years of the original account holder’s death. But recent IRS clarification adds a new layer: If the original owner had already started their RMDs, the beneficiary must also begin annual withdrawals—rather than waiting until year 10 for a lump-sum distribution.
These annual withdrawals are based on the beneficiary’s own life expectancy, not the original owner's. That means the amount changes each year, and missing a withdrawal could result in a significant penalty. If you have not taken any of the RMDs prior to 2025, no need to worry, there are no penalties for not taking distribtuions prior to this year.
Exceptions for Eligible Designated Beneficiaries (EDBs)
It’s important to note that the 10-year rule and the new RMD requirement do not apply in the same way to Eligible Designated Beneficiaries (EDBs). This special category includes surviving spouses, minor children of the original account holder (until they reach the age of majority), individuals with disabilities or chronic illnesses, and beneficiaries who are less than 10 years younger than the original IRA owner. These beneficiaries may still use the traditional "stretch IRA" strategy—taking distributions based solely on their life expectancy—without being subject to the 10-year rule. However, once a minor child reaches the age of majority, the 10-year clock starts.
Strategic Considerations
While these rules limit flexibility for most, there are still ways to navigate them strategically:
Tax Planning: In some cases, it might make sense to deplete the account sooner than required—especially if you expect your income or tax rates to rise over time.
Cash Flow Needs: Align withdrawals with planned expenses, life events, or other financial goals.
Penalty Avoidance: Missing an RMD can result in a penalty of up to 25%, though that may be reduced if corrected quickly.
How We Can Help
Understanding your distribution requirements—and aligning them with your broader financial plan—can be complex. We can help you:
Calculate your required distributions accurately
Determine whether you qualify as an EDB
Evaluate the tax implications of different withdrawal strategies in collaboration with your tax professional
Create a plan that supports your short- and long-term financial goals
If you've inherited an IRA or expect to in the near future, now is the time to review the updated rules and make sure your strategy is aligned. Let’s talk through your options and help ensure you're making the most of this important asset.
Disclosure: Kindred Wealth Partners does not offer tax or legal advice.