The Internal Revenue Service (IRS) has finalized new rules for inherited Individual Retirement Accounts (IRAs) that are set to take effect on January 1, 2025. These changes will impact individuals who have inherited an IRA since 2020 or expect to inherit one in the future. Under the Secure Act, passed in December 2019, the stretch IRA strategy, which allowed beneficiaries to take distributions over their life expectancy, was eliminated.
Instead, a 10-year cap was introduced on how long inherited assets can grow tax-deferred, unless specific exceptions are met. These rules apply to both traditional and Roth IRAs. For Roth IRAs, beneficiaries have a 10-year period to distribute the account, with distributions being optional for the first nine years.
New IRS rules for Roth IRAs
However, the account must be emptied by the end of the 10th year. For traditional IRAs, if the account owner died on or after the required beginning date for Required Minimum Distributions (RMDs), the “at least as rapidly” rule applies.
This means that if the original account owner or a primary beneficiary was already taking annual RMDs, the successor beneficiary must also take annual RMDs within the 10-year period. The IRS has clarified that starting in 2025, beneficiaries who inherited an account from someone already taking RMDs must take annual RMDs. Failure to do so will result in an excise tax penalty.
It is crucial for anyone inheriting an IRA to understand these new rules to avoid unnecessary penalties and effectively manage the inherited funds. Consulting with a financial advisor can help navigate these changes and ensure compliance with the updated regulations.
