Inherited IRA rule change triggers 25% tax penalty

A new rule for inherited individual retirement accounts (IRAs) will take effect in 2025. This change could lead to a 25% tax penalty for certain heirs if they do not follow the requirements. Starting in 2025, some beneficiaries will need to take required minimum distributions (RMDs) each year. They must also fully withdraw the funds within 10 years. This rule mainly affects adult children and other non-spouse heirs if the original IRA owner had reached the RMD age before their death. Many investors are not aware of these new guidelines. Before a law change in 2019, heirs could stretch withdrawals over their lifetime to manage taxes better. However, the 10-year rule has been in effect for non-spouses since 2020. Last year, the IRS clarified that yearly RMDs are also required if the original owner had reached the RMD age. Missing these withdrawals could result in penalties. If heirs fail to take their RMDs in 2025, they may face a 25% penalty on the amount not withdrawn. However, they can reduce the fee to 10% by making the required withdrawal within two years and filing the appropriate form. In some situations, the IRS may waive the penalty. Experts suggest that some heirs should consider taking money from inherited accounts sooner rather than later. Skipping yearly withdrawals could lead to higher RMDs down the line. Strategically timing the withdrawals may help manage tax obligations more effectively. Financial advisors recommend planning IRA withdrawals during lower-income years for better tax outcomes.