If you inherited a personal retirement account, the IRS could impose penalties of up to 25% if there are significant changes in 2025 and no action is taken by the end of the year.
Starting in 2025, certain non-spouse heirs, including adult children, must begin taking required minimum distributions (RMDs) while emptying inherited IRAs over a 10-year period, according to IRS regulations announced in 2024.
The shift comes as investors prepare for a “massive wealth transfer,” with more than $100 trillion expected to flow to heirs by 2048, according to a December report from Cerulli Associates. Much of that wealth will eventually pass from parents to their adult children, and tax planning for that windfall will be important, experts say.
Experts say some heirs should consider draining their accounts sooner than the IRS requires, depending on their tax situation.
Here’s what’s important to know about the 2025 changes and how to avoid IRS penalties.
Who should take RMDs in 2025?
Starting in 2020, certain inherited accounts will be subject to a “10-year rule” that requires heirs to use up their balances by the 10th year after the original account owner’s death.
The “10-year rule” and new RMD requirements apply to most non-spouse beneficiaries, such as adult children, if the original IRA owner reached RMD age before death.
“Most of our clients fall into that 10-year window” and have faced “years of ambiguity” about RMDs, said Christine McKenna, a certified financial planner and president of Darrow Wealth Management in Needham, Massachusetts.
Until the IRS issued guidance last year, it was unclear whether RMDs were required each year during the 10-year drawdown. As a result, the agency waived penalties for missed RMDs on inherited IRAs for multiple years.
But starting in 2025, certain heirs will be required to start taking annual RMDs or face a potential penalty of 25% of the amount they are due to withdraw.
You can reduce that fee to 10% by withdrawing the appropriate RMD and filing Form 5329 within two years. In some cases, government agencies will waive fines entirely.
Dennis Appleby, IRA expert and CEO of Appleby Retirement Consulting, previously told CNBC.
Play the “Income Tax Classification Game”
Even if RMDs were not applied to inherited IRAs in 2025, most heirs would still have to deplete the balance within 10 years. That may require planning to avoid a huge tax burden in the final year, experts say.
For example, CFP Marianela Corrado, CEO of Tobias Financial Advisors in Plantation, Fla., said you can “game the income tax bracket” by making early withdrawals in low-income years. She is a member of CNBC’s Financial Advisory Council.
Corrado, who is also a certified public accountant, said that if there is a temporary drop in income, “there may be room to fill the lower ranks.”
However, they also need to consider the tax implications of increased income, such as the phasing out of tax breaks enacted by President Donald Trump’s “Big and Beautiful Bill.”
“There’s a lot to think about” when it comes to withdrawing inherited IRAs, said McKenna of Darrow Wealth Management. “It requires very thoughtful analysis.”
