Inheriting an IRA in 2025? What Beneficiaries Should Know

The first step is identifying what type of beneficiary you are, as the rules vary significantly:

Spouse Beneficiaries

Spouses have the most flexibility and can choose between two main options: Treat it as your own: Roll the IRA into your own retirement account. This allows you to defer required minimum distributions (RMDs) until age 73 and avoid the 10% early withdrawal penalty if you're over age 59½. Keep it as an inherited IRA: This can be useful if you're under 59½ and may need to withdraw funds early—distributions from inherited IRAs avoid the 10% penalty. Even if the original owner had already begun RMDs, a missed RMD for the year of death must still be taken.

Non-Spouse Beneficiaries

Most non-spouse beneficiaries are now subject to the 10-year rule, which requires the account to be fully distributed within 10 years of the original owner’s death. In many cases, annual RMDs are not required under the 10-year rule. However, if the original account owner had already begun taking RMDs, the IRS has indicated that annual distributions may be required during the 10-year window, though enforcement has been delayed. This area remains under IRS review, so it’s important to consult a tax professional.

Eligible Designated Beneficiaries

Some non-spouse beneficiaries qualify for an exception to the 10-year rule. These include:

• Minor children (until age 21)
• Chronically ill or disabled individuals
• Beneficiaries who are less than 10 years younger than the original account holder

These beneficiaries may take RMDs based on their life expectancy, which allows for a longer distribution period and more tax-deferred growth.

Planning Strategies to Enhance Value

Inherited IRAs are subject to income tax (unless it’s a Roth), but smart planning can reduce the tax impact:

Coordinate With Your Income

Taking withdrawals in years when your income is lower can reduce the overall tax burden.

Use Market Volatility to Your Advantage

Distributing assets during market downturns and reinvesting at lower prices may help preserve capital and improve long-term outcomes.

Harvest Losses When Possible

If you have taxable investments, pairing inherited IRA distributions with tax-loss harvesting may further reduce your annual tax bill.

Inherited Roth IRAs

Withdrawals are generally tax-free if the account has been open for at least five years. In that case, letting the account grow untouched for the full 10 years may be the most effective approach.

It's Not Just About Taxes- It's Your Goals Too

The right withdrawal strategy depends on your full financial picture. Consider the following:

• Do you need income now, or can you let the funds grow?
• Are you trying to stay within a lower tax bracket?
• Are there other income sources or retirement assets to coordinate around?

Each choice has ripple effects on your broader financial goals. The best strategy is often highly individualized.

Putting it All Together- We Can Help

If you’ve inherited an IRA or expect to in the future, we can help you:

• Clarify your beneficiary status
• Create a withdrawal strategy that helps mitigate taxes
• Coordinate the inheritance with your long-term financial and estate plans

Let’s talk about how to make the most of what’s been passed on to you—in a way that supports your future.