The IRS has issued final regulations requiring most nonspouse beneficiaries to deplete inherited retirement accounts within 10 years and take annual required minimum distributions (RMDs). This new rule, applying to accounts inherited since 2020 if the original owner had already started RMDs, marks a significant change from the previous lifetime “stretch” option for withdrawals.
The 10-year withdrawal window could lead to higher tax bills in those years, especially for high-income heirs. “Heirs are missing the boat,” says IRA expert Ed Slott, who advises considering larger withdrawals now while tax rates are lower. Pretax inherited account withdrawals are subject to regular income taxes, and with current lower federal income tax brackets set to expire after 2025, there may be a limited window to take advantage of these rates.
Starting in 2025, heirs who are not spouses, minors, disabled, chronically ill, or certain trusts must begin yearly RMDs from inherited accounts. Certified financial planner Edward Jastrem emphasizes the importance of understanding these new requirements to avoid penalties. If yearly RMDs are missed, a 25% penalty on the amount should have been withdrawn applies, reducible to 10% if corrected within two years.
As beneficiaries navigate these changes, experts recommend weighing current and future tax implications before deciding on withdrawal strategies. The new IRS rules present both challenges and opportunities for those inheriting retirement accounts.
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