Starting in 2025, heirs of inherited Individual Retirement Accounts (IRAs) must navigate new regulations mandating annual withdrawals. This change primarily impacts non-spouse beneficiaries if the original account owner had reached the required minimum distribution (RMD) age before passing away. Under these rules, heirs must deplete the inherited IRA within a decade, facing potential penalties for missed distributions.
The Internal Revenue Service (IRS) will enforce a 25% penalty on missed RMDs beginning in 2025. This requirement stems from the "10-year rule," introduced in 2020, which obligates heirs to fully withdraw inherited IRAs by the end of the tenth year following the original owner's death. This policy aims to ensure larger withdrawals occur earlier, thus reducing yearly income taxes for beneficiaries.
Before the Secure Act of 2019, heirs could stretch withdrawals over their lifetimes. Now, only certain groups, such as spouses, minor children, disabled or chronically ill individuals, and specific trusts, are exempt from this rule. The change requires careful planning to manage tax implications and avoid what certified financial planner Edward Jastrem refers to as the "10-year tax squeeze."
"10-year tax squeeze" – Edward Jastrem, chief planning officer at Heritage Financial Services in Westwood, Massachusetts.
The necessity for precise timing in withdrawals is emphasized by the potential reduction of penalties if the required minimum distribution is "timely corrected" within two years, according to IRS guidelines. This means that beneficiaries need to consider their entire tax situation, including multi-year projections of adjusted gross income, when planning withdrawals.
Edward Jastrem highlights the complexity of these decisions, describing it as a "spiderweb mess of decision-making" that requires strategic planning to avoid unnecessary tax burdens.
"spiderweb mess of decision-making" – Edward Jastrem, chief planning officer at Heritage Financial Services in Westwood, Massachusetts.
Beneficiaries should seek advice on managing withdrawals effectively to mitigate penalties and optimize their financial outcomes. Proper planning can prevent the financial strain of unexpected tax liabilities and ensure compliance with IRS requirements.