If you inherited an IRA after 2019, there's a key change starting in 2025. The old rules, where you could stretch withdrawals over your lifetime, are mostly gone. Now, most beneficiaries have 10 years to empty the account.
Here's the catch: While you have 10 years, you also likely need to take yearly withdrawals, called Required Minimum Distributions (RMDs), starting in 2025. This applies even if you're planning to wait to withdraw the bulk of the money.
When are RMDs Required?
RMDs are required annually, beginning in the year after the original IRA owner's death. However, for those inheriting in 2020-2024, the IRS waived RMDs for those years. So, even though the 10-year rule applies, the first required distribution for most beneficiaries will be in 2025. After that, you must take an RMD each year until the account is empty.
Who's affected? Generally, anyone who inherited an IRA from someone who died in 2020 or later. There are some exceptions, like for surviving spouses, minor children, and beneficiaries close in age to the deceased. It's best to check with a tax professional if you think you might qualify for an exception.
Penalties for Missing RMDs
Failing to take your RMD on time can result in a significant penalty. The IRS can charge a penalty equal to 25% of the amount you should have withdrawn. This is a serious consequence, so it's crucial to understand your RMD obligations and make sure you take the required withdrawals each year. It's also important to note that even if the penalty is assessed, you still must pay the taxes due on the RMD amount.
Key takeaways:
- 10-Year Rule: If you inherited an IRA after 2019 and are not a spouse, minor, disabled or less than 10 years younger than the original account owner, you must withdraw all the money within 10 years after the year of death.
- RMDs Start in 2025: Even with the 10-year rule, you'll probably need to take yearly RMDs, with the first one due in 2025 for most beneficiaries who inherited between 2020 and 2024.
- Penalties: Missing an RMD can mean a hefty 25% penalty.
- Traditional vs. Roth: The 10-year rule applies to both. Withdrawals from a Traditional IRA are taxed; withdrawals from a Roth IRA are tax-free, but still must be taken.
- Plan Ahead: Think about how you'll use the money and how to minimize taxes, especially with Traditional IRAs.