Beneficiaries of inherited IRAs need to know about upcoming changes to required minimum distributions (RMDs). Missed RMDs will incur a penalty starting in 2025. The IRS released regulations last year outlining rules for RMDs from inherited IRAs. These laws require that some heirs receive regular RMDs each year while draining inherited IRAs in a decade.
Inherited IRAs
Under the 10-year rule, the primary non-spouse heirs of inherited IRAs must fully distribute the account within a decade. This rule essentially mandates that heirs clear out inherited IRA accounts within the 10th year following the original owner’s death. Beginning in 2025, the IRS will require that RMDs be taken over this 10-year span for “non-designated” beneficiaries.
The RMD requirement applies to all non-spouse heirs, including adult children. For beneficiaries to have to take RMDs, the original account owner has to have reached RMD age before they died.
The penalty for missed RMDs is substantial: 25% of the amount that should have been withdrawn. The IRS offers some leniency, potentially reducing the penalty to 10% if the proper amount is withdrawn within two years and Form 5329 is filed. The agency can completely waive the penalty in certain circumstances.
The quicker you do it, the better it is. - CFP Scott Bishop, partner and managing director of Presidio Wealth Partners, based in Houston.
In the past, the IRS has waived penalties for missed RMDs with inherited IRAs. The Secure Act of 2019 made significant changes to the rules for inherited IRAs, including eliminating the stretch IRA RMD requirement. Before the Secure Act, IRA heirs could “stretch” inherited account withdrawals over their lifetime.
This requirement is meant to make sure that heirs actually do take required minimum distributions from inherited IRAs. The IRS will waive penalties for RMDs that were missed. Withdraw the minimum required amount within two years and file Form 5329. That’s it.
