The rules for managing inherited IRAs are changing in 2025, and if you’re a small business owner or a beneficiary of an IRA, it’s essential to understand the implications. Missteps could lead to costly tax penalties, so staying ahead of these changes is critical to safeguard your finances.
This article will break down the new requirements, how they differ from previous regulations, and key considerations to help you adapt and make the most of your inheritance.
What Is the 2025 Inherited IRA Rule Change?
Starting in 2025, certain beneficiaries of inherited IRAs will be required to withdraw annual Required Minimum Distributions (RMDs) during the 10-year period in which inherited accounts must be depleted.
This shift stems from the SECURE Act, passed in 2019, which eliminated the lifetime withdrawal option for most non-spouse beneficiaries. Since then, affected heirs have had to empty inherited IRAs within 10 years of the original account owner’s death.
The new 2025 rule clarifies and adds an extra layer to this requirement. If the original account owner had already reached their RMD age before passing away, heirs will now need to take yearly RMDs throughout the 10-year withdrawal window. Failing to comply could result in severe IRS penalties.
What’s Changing, at a Glance
- Before 2025: Most non-spouse heirs could delay distributions until the 10th year, as long as the inherited IRA was emptied by then.
- Starting in 2025: Annual RMDs are mandatory if the original owner was already taking RMDs.
For many beneficiaries, this will mean having to carefully plan withdrawals to avoid accidentally triggering unnecessary taxes or penalties.
Who Does This Rule Affect?
The new rule predominantly impacts non-spouse beneficiaries, such as adult children. Specifically, it applies to beneficiaries when the original IRA owner had reached their RMD age at the time of death.
Exemptions include heirs who are minor children, disabled or chronically ill individuals, or certain types of trusts. These groups were already excluded from the 10-year withdrawal limit created by the SECURE Act and continue to follow pre-2020 withdrawal rules.
If you are unsure whether you’re impacted by these changes, consulting with a financial advisor could save you from potential penalties or missed planning opportunities.
The Risks of Non-Compliance
A significant consequence of the 2025 rule change is the penalty for missed RMDs. Under the new guidelines, non-compliant beneficiaries could face a 25% penalty on the amount they fail to withdraw. However, if the oversight is corrected and the proper withdrawal is made within two years, the penalty could be reduced to 10%.
The IRS may even waive penalties entirely in certain cases, provided you file Form 5329 and include a reasonable explanation for the oversight. Nonetheless, these situations often require professional assistance and should be avoided when possible.
Why Some Beneficiaries May Want to Start Early Withdrawals
Financial advisors are urging eligible beneficiaries to take a proactive approach. While the new rule mandates yearly RMDs, some experts recommend spreading withdrawals evenly across a 10-year period to minimize the potential tax burden.
By strategically planning withdrawals during lower-income years, beneficiaries can reduce their tax liability while steadily drawing down the account. Waiting until later in the 10-year period could result in much larger mandatory withdrawals, potentially bumping beneficiaries into higher tax brackets.
Key Considerations for Small Business Owners
For small business owners, inherited IRAs can be a double-edged sword. On the positive side, they provide financial support and flexibility during challenging times. However, managing withdrawals while juggling the complexity of running a business introduces unique challenges.
Here’s how to stay prepared:
- Understand the RMD Requirements: Ensure that you know whether your inherited IRA falls under the new requirements.
- Account for Taxes: Plan withdrawals in a way that aligns with your income levels and business cash flow.
- Seek Professional Help: Work with an accountant or financial advisor to integrate your withdrawals into both your personal and business financial planning.
Practical Tips to Navigate the 2025 Rule Change
If you’re impacted by this rule, consider these actionable steps to manage your inherited IRA responsibly:
- Verify Your Beneficiary Status: Determine whether the new RMD requirement applies to you based on when the original account holder passed away and their age at the time.
- Review RMD Calculations: Familiarize yourself with how your RMD is calculated to ensure accuracy.
- Consult Tax Professionals: Seek advice to create a strategy that minimizes tax impacts.
- Monitor Your Account: Stay on top of deadlines and documentation to avoid missed distributions.
- Plan for Future Years: Budget withdrawals over the full 10 years to manage taxes effectively.
Final Thoughts
The 2025 inherited IRA rule change introduces new challenges but also opportunities to optimize your finances. Whether you’re an individual inheritor or a business owner juggling multiple priorities, proactive planning is key to staying compliant and making the most of your inheritance.
Navigating these updates can be daunting, but you don’t have to go it alone. Our team of accounting experts is here to guide you through the complexities and help you align your financial plan with the updated regulations.
Contact us today to ensure your accounts are compliant and set up for long-term success!