How the 2025 Inherited IRA Changes Could Affect Your Tax Planning
If you’ve inherited—or expect to inherit—an individual retirement account (IRA), upcoming changes in 2025 could have a major impact on your tax strategy. The new rules affect required minimum distributions (RMDs), withdrawal timelines and tax liabilities. This makes it crucial to plan ahead.
Key Updates to Inherited IRAs
Below are some of the significant updates to the inherited IRA tax changes for 2025:
Mandatory RMDs
Starting in 2025, most inherited IRAs will require annual required minimum distributions (RMDs). Failing to take RMDs could result in steep penalties—up to 25% of the amount not withdrawn. However, this can be reduced to 10% if corrected quickly.
Stricter 10-Year Rule
Non-spousal beneficiaries must fully withdraw all funds from an inherited IRA within 10 years of the original owner’s passing. In most cases, annual RMDs will be required, preventing beneficiaries from delaying withdrawals until the final year.
Special Considerations for Spouses and Certain Beneficiaries
- Surviving spouses have more flexibility. They can assume ownership of the IRA, treating it as their own. Or, they can withdraw as a beneficiary. If it’s a Roth IRA, they may enjoy tax-free growth with no RMDs.
- Minor children have until age 31 to fully deplete the account. The 10-year withdrawal rule starts once they turn 21.
- Disabled beneficiaries may be exempt from the 10-year rule entirely, allowing for extended tax-deferred growth.
Planning Strategies to Reduce Tax Impact
A strategic withdrawal plan can help minimize tax burdens. Spreading withdrawals evenly over 10 years can prevent being pushed into a higher tax bracket. Additionally, timing distributions based on future tax rate expectations can further optimize savings.
With these new rules, proactive planning is essential. Consult the financial advisement specialists at Illumination Wealth to ensure your inherited IRA withdrawals align with your financial goals and tax strategy. Contact us today!