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2025: New Inherited IRA Rules Every Beneficiary Should Know

January 24, 2025

Written by: Daniel Gleich

Key Points 

  • Starting in 2025, most non-spouse beneficiaries have a 10-year window to fully distribute an Inherited IRA’s assets.
  • The IRS also clarified rules regarding taking a required minimum distribution (RMD) from an Inherited IRA, depending on whether the original account holder has already begun taking RMDs.
  • Madison Trust Self-Directed IRA Specialists are here to answer any questions you have about the new rules.
Notebook with “New Rules” highlighted in green to show that the Inherited IRA 10-Year Rule will begin in 2025.

In addition to the 2025 IRA contribution limits update, the IRS has also recently finalized regulations regarding Inherited IRAs and required minimum distributions (RMDs). These rules come into effect in 2025 and aim to clarify the regulations that the Secure Act established in 2019. Let’s explore the rule changes and how they may affect how you manage your estate planning and Self-Directed IRA (SDIRA) inheritance.  

Inherited IRA Basics

Three generations (grandmother, mother, and daughter) smiling because they have completed their legacy planning and designated their beneficiaries of their retirement account.

One common method to pass wealth across generations is through an Inherited IRA. An Inherited IRA is an account set up by a designated beneficiary to receive assets from the original owner’s IRA after they pass away. You can set up these accounts as Traditional IRAs or Roth IRAs, matching the account type that the assets are being inherited from. The same rules apply to standard IRAs and Self-Directed IRAs.

One difference between Inherited IRAs and non-inherited IRAs is the withdrawal rules. Generally, RMDs happen before age 73 in Inherited IRAs, which is when RMDs for the original IRA account holder typically begin. In addition, there is a 10-year period within which non-spouse beneficiaries must deplete an Inherited IRA.

Understanding the 2025 Changes to Inherited IRAs

In 2019, the Secure Act created a “Stretch IRA” concept. This allowed beneficiaries to spread out Inherited IRA distributions over their lifetime. In 2025, this concept is being eliminated for most non-spouse beneficiaries. Now, most non-spouse beneficiaries have a 10-year window to fully distribute the Inherited IRA’s assets.

The IRS has also recently clarified the rules regarding taking RMDs from an Inherited IRA. For beneficiaries who inherit an IRA from an account holder who has already begun taking RMDs, annual distributions are required within the 10-year timeframe. In this case, the Inherited IRA owner must take RMDs in years one through nine and withdraw the remaining assets by the end of year ten.  

Three generations (grandfather, son, and grandson) laughing while looking at a laptop to indicate the importance of dedicating Self-Directed IRA beneficiaries and estate planning.

On the other hand, if the original account holder has not yet started taking their RMDs, their beneficiaries have more flexibility. In this scenario, beneficiaries can decide how much and how often to withdraw from the account over the ten years.  

In addition, in 2025, those who do not take their RMDs will be subject to a 25% penalty. In 2021-2024 there was relief for certain beneficiaries who were required to take RMDs from an Inherited IRA but did not. This relief is ending in 2025.

Example of 2025 Inherited IRA Rule Change

Businessman on a bench on a tablet researching the Inherited IRA 10-Year Rule.

Frank inherited a Self-Directed Traditional IRA from his father, Dave, who died at age 86 on March 2, 2020. Under the SECURE Act, Frank is subject to the Inherited IRA 10-Year payout rule. Frank must empty his Inherited Traditional IRA by December 31, 2030.

In addition, Frank’s father began taking RMDs from his Self-Directed Traditional IRA before he passed in 2020. Because of this, Frank must take annual RMDs. He will take these RMDs in years one through nine, either based on life expectancy factor or through a lump sum distribution. He must fully deplete the account by the end of year ten.

Who is Affected by the 2025 Inherited IRA Rule?

The new regulation affects all non-spouse beneficiaries. This includes children, grandchildren, relatives, or any other designated individual.  

Those who are exempt from this rule include:  

  • Surviving Spouses  
  • Children Under Age 21 
  • Disabled or Chronically Ill Individuals  
  • Beneficiaries not more than 10 years younger than the deceased  

When determining if this change affects you, it is important to look at the type of beneficiary you are to the original IRA account holder and the original owner’s age at which they passed away.

Does the 2025 Inherited IRA 10-Year Rule Apply To You? If you are not an IRA beneficiary that is a surviving spouse, under age 21, disable or chronically ill, or more than 10 years younger than the deceased, this rule applies to you. You have 10 years to fully distribute your Inherited IRA's assets. If the original IRA account holder has already begun to take required minimum distributions, then annual distributions are required within the 10-year timeframe. You must take RMDs in years 1-9, and withdraw the remaining amount in year 10. If the original account holder has not yet begun taking RMDs, then annual distributions are not required within the 10-year timeframe. You have more flexibility and can decide how much and how often to withdraw from the account over the 10 years.

Key Considerations

Icon of a tax document with a check on it and a magnifying glass to indicate potential tax implications when withdrawing money from an IRA.

Potential Tax Implications

Withdrawing a large sum within 10 years can potentially impact your tax bracket. Larger withdrawals can potentially lead to more taxes on distributions and at a higher rate.

Magnifying glass to signify the best practice of consulting an estate planner, tax advisor, IRA Specialist, and legal professional when creating an investment strategy.

Investing Strategy

The 10-Year Rule may require you to make adjustments to your investment strategy to ensure you meet withdrawal requirements while minimizing risk. It is considered best practice to consult an estate planner, tax advisor, IRA Specialist, and legal professional when creating an investment strategy.

Document with a house and a signed certificate to indicate mindful estate planning, including designating beneficiaries wisely.

Estate Planning

The rule change highlights the importance of mindful estate planning, including designating beneficiaries wisely and considering alternative distribution strategies. With this change, beneficiaries cannot rely on Inherited IRAs for a lifetime income stream.

Conclusion: Let's Tie It All Up

With a new year often comes new changes, including IRA laws. Consider staying up to date on IRA rules, speaking with a financial professional, and reviewing your own beneficiary designations. Our team at Madison Trust prioritizes providing you with education. Schedule a free discovery call to get all your Self-Directed IRA questions answered.  

Self-Directed IRA account holders shaking hands with a Self-Directed IRA Specialist to indicate the important relationship between the two.

Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

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