Inherited IRA rules changed — how to avoid a tax bomb and penalties under new IRS rules

Inherited IRA tax rules: Getting an inherited IRA can feel like a financial boost, but recent IRS changes mean beneficiaries could face unexpected taxes or penalties if they aren’t careful. The rules, which were passed in 2019 and finalized in 2024, now apply to all retirement accounts inherited in 2020 or later.

Inherited IRA Rules: How to Avoid Penalties and Tax Surprises

Mark Steber, chief tax information officer at Jackson Hewitt said that, “There are many things people should know if they inherit an IRA," adding, "Arguably the most important? Understand that you may owe taxes sooner or later on the money inherited," as quoted by USA Today.

What Is the 10-Year Rule for Inherited IRAs

10-year rule: Most beneficiaries have to empty an inherited IRA within 10 years, whether it’s traditional or Roth, unless you’re a surviving spouse, a minor child, disabled, chronically ill, or less than 10 years younger than the account owner.


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Required Minimum Distributions (RMDs) Explained

Required minimum distributions (RMDs): If the original IRA owner had started annual withdrawals, you’ll need to continue them by year-end. Missing an RMD can lead to a 25% penalty, though it can drop to 10% if corrected within two years. Roth IRAs don’t require RMDs, so withdrawals aren’t mandatory.

Missed Your RMD? Here’s What to Do

If you didn’t take a required RMD last year, act quickly. Withdraw the amount as soon as possible and file Form 5329 with your 2025 federal tax return to reduce penalties.

How Inherited IRAs Are Taxed

Traditional IRA withdrawals are taxed as ordinary income, which could push you into higher tax brackets if multiple years’ worth of distributions are due. Roth IRA withdrawals are tax-free as long as the account has been open at least five years.

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Strategies to Avoid a Tax Bomb

You can take more than the minimum each year. Vanguard suggests spreading distributions evenly over 10 years to stay in lower tax brackets, rather than leaving a large balance for the final year. Timing can also help if your income fluctuates, which may affect tax deductions, credits, or benefits like student loans and Medicare costs.

FAQs

Are inherited IRA withdrawals taxed?

Traditional IRA withdrawals are taxed as ordinary income. Roth withdrawals are tax-free if the account has been open at least five years.



Can I withdraw more than the RMD?

Yes, you can take more than the minimum each year. Spreading withdrawals evenly may help minimize taxes.