The rules around inherited Individual Retirement Accounts (IRAs) are set to change in 2025. This change, stemming from the SECURE Act 2.0, will impact how beneficiaries manage inherited retirement accounts. Previously, those who inherited IRAs could stretch distributions over their lifetime.
However, with the Secure Act in 2019, beneficiaries inheriting IRAs from 2020 onwards must withdraw the entire account balance within 10 years of the original owner’s death. Since the new legislation came into effect, there has been confusion among beneficiaries concerning the withdrawal rules. Clarifications have recently been provided, stating that required yearly minimum distributions (RMDs) must align with the ten-year rule.
Not all inherited IRAs will be subject to these RMD withdrawals. “You have a multi-dimensional matrix of outcomes for different inherited IRAs,” says Joel Dickson, global head of advice methodology at Vanguard.
Changes to IRA beneficiary rules
“It’s important to understand how these rules impact your distribution strategy.”
In July of this year, the IRS confirmed that yearly RMDs will need to be taken by certain beneficiaries beginning in 2025. If an annual RMD withdrawal is missed, beneficiaries will be subject to a 25% penalty on the needed amount. This penalty can be reduced to 10% with timely correction.
These changes emphasize the importance of proactive estate planning. Individuals with retirement accounts must consider how these changes will affect their heirs. Those creating or updating their estate plans should clearly outline their intentions for their retirement accounts and discuss these plans with their intended beneficiaries.
By understanding and planning for these new rules, beneficiaries can better position themselves for financial success and ensure that they make the most of their inherited assets. Proper adherence to the new regulations will also help avoid penalties and maximize the benefits of their inheritance.
