What’s worse than forgetting to take out the trash? Forgetting to take money out of your inherited IRA, because that mistake could lead to a 25 percent penalty if the right steps aren’t taken.
Under current IRS regulations, many non-spouse heirs, such as adult children, must take required minimum distributions (RMDs) each year and fully deplete the inherited account within ten years if the original IRA owner had already begun their own RMDs before passing.
It’s one of the most significant updates to inherited IRA rules in recent years, designed to bring clarity after a long period of confusion and penalty waivers.
Why This Rule Matters
The ten-year rule was established under the SECURE Act to prevent heirs from stretching IRA distributions indefinitely. But the IRS later clarified that for many beneficiaries, annual RMDs are also required during that ten-year window.
In the past, the IRS temporarily waived penalties for missed distributions while fine-tuning the regulations. That relief has since ended, and the rules now apply going forward.
Failing to take the proper withdrawal can trigger an excise tax of 25 percent on the amount that should have been withdrawn. If the shortfall is corrected within two tax years and reported on Form 5329, the penalty can drop to 10 percent — and in certain cases, the IRS may waive it entirely if the mistake was reasonable and promptly corrected.
Who the Rule Affects
These RMD requirements generally apply to non-spouse beneficiaries of traditional IRAs or employer-sponsored retirement plans when the original account holder had already reached their own RMD start date before death.
Those typically not subject to annual RMDs include:
- Spouses who treat the IRA as their own.
- Eligible designated beneficiaries (such as minor children, disabled or chronically ill individuals, or heirs less than ten years younger than the decedent).
- Beneficiaries of account holders who died before reaching RMD age — these heirs still must empty the account within ten years, but annual withdrawals are not required during that period.
Timing and Tax Strategy
Even when annual withdrawals aren’t required, the ten-year clock still applies. The entire account must be emptied by the end of year ten.
Spreading withdrawals strategically may help reduce tax exposure. Taking smaller distributions over several years, especially during lower-income years, may help avoid a large, heavily taxed payout later. Conversely, withdrawing too much too soon could push you into a higher tax bracket.
The goal is to find balance. As many financial professionals note, planning IRA withdrawals is less about “beating the system” and more about managing timing, income, and taxes wisely.
Why It’s Worth Reviewing Now
Inherited IRAs are a meaningful legacy, but they also come with new responsibilities. Understanding the current RMD framework may help heirs avoid penalties and manage inherited assets more efficiently.
If you’ve inherited an IRA, it’s worth confirming whether annual withdrawals apply to your situation and reviewing your approach with a licensed financial or tax professional.
Taking time to plan now can help preserve more of what was meant to be passed down, and help keep your inheritance working for you, not against you.
Source:
Kate Dore. “Inherited IRAs Have a Key Tax Change for 2025. What to Know to Avoid a Penalty of up to 25%.” CNBC, 24 Oct. 2025. This material is for informational and educational purposes only and is not intended as legal or tax advice. Consult your licensed financial or tax professional regarding your specific situation.
