New Tax Rules for Inherited IRAs What Beneficiaries Should Know about RMDs and the 10-year Rule

As of December 31, 2025, most non-spouse beneficiaries inheriting an IRA account from an individual who died in 2020 or later must fully distribute the account by the end of the tenth year following the original owner’s death. This rule applies to both traditional and Roth IRAs. However, Roth IRA withdrawals are generally tax-free provided the account has been open for at least five years. If the original owner had already begun taking required minimum distributions (RMDs) before death, beneficiaries must take distributions in years 1-9 and fully withdraw the remaining balance in year 10. If the original owner died before reaching RMD age, then annual RMDs are not required. Regardless, the account must still be zeroed out by year 10.

Failure to take required RMDs can result in an IRS imposed 25% penalty tax on the amount that should have been withdrawn. Penalties are calculated and reported on IRS Form 5329 filed with the federal income tax return. Due to uncertainty in 2025 missed withdrawals, this oversight can likely be corrected within two years by providing a reasonable explanation resulting in a possible reduction in penalty to 10%.

Certain beneficiaries are exempt from this new regulation including surviving spouses, minors (under 21), disabled or chronically ill individuals, and beneficiaries who are not more than 10 years younger than the deceased. A surviving spouse may treat the inherited IRA as their own, rolling it into their own existing IRA account. This allows them to delay RMDs until reaching their own RMD age and potentially make more contributions. Spouses can also convert inherited traditional IRAs into Roth IRAs, paying taxes on the converted amount.

Beneficiaries of original owners who died before their Required Beginning Date may choose to spread withdrawals over their allotted 10-year period to avoid a large tax hit at the end of the decade, as large sum withdrawals often push individuals into higher tax brackets.

When estate planning with these new regulations in mind, Charitable Remainder Trusts, Roth conversions, and life insurance can help manage the tax impact and preserve wealth for surviving heirs.

At Killingsworth Spencer in Roswell, GA, our CPAs and EAs are dedicated to helping taxpayers determine the best options for their particular circumstances. For more information or to schedule an appointment, please call us at 770-552-8286. Visit us at www.killingsworthspencerllc.com