Editor’s Note: I spend a great deal of time considering how to make things as straightforward as possible for my heirs. Once a year, I write them a letter outlining what they will inherit, along with the necessary account numbers and contact details.

Everyone’s situation is different, so it’s important to assess your heirs’ financial knowledge. This will guide how much you simplify the inheritance process. For example, if your heir isn’t financially savvy, handing over a complex stock portfolio may not be wise. Simplification is key when necessary. It’s also essential to stay informed about rule changes that could affect your heirs and their inheritance.

Key Changes for 2025

In 2025, new rules will affect certain heirs with inherited individual retirement accounts (IRAs). These heirs, primarily non-spousal beneficiaries, must take yearly required minimum distributions (RMDs) or face penalties. The rule applies if the original account owner had already reached their required minimum distribution age before passing away.

However, financial experts suggest that even if yearly withdrawals aren’t mandatory, some beneficiaries might benefit from taking distributions earlier. This depends on their financial situation and long-term tax planning strategy.

Here’s a breakdown of the changes coming in 2025 and tips on how heirs can navigate the new rules.

Understanding the 10-Year Rule

Prior to the Secure Act of 2019, beneficiaries could “stretch” IRA withdrawals over their lifetime, helping to minimize yearly tax burdens. However, the Secure Act introduced the “10-year rule” for most non-spousal beneficiaries who inherit IRAs after 2020. Under this rule, heirs must empty the inherited IRA within 10 years of the original account owner’s death.

This rule does not apply to spouses, minor children, disabled or chronically ill beneficiaries, or certain trusts. While the rule seemed straightforward, there has been confusion about whether yearly RMDs are required during the 10-year window.

New RMD Requirements Starting in 2025

The IRS recently clarified that starting in 2025, beneficiaries must take yearly RMDs if the original IRA owner had already reached their RMD age at the time of death. Failure to take the required distribution can result in a penalty of 25% on the amount missed. However, this penalty may be reduced to 10% if the RMD is corrected within two years.

Strategic Distributions for Lower Taxes

For beneficiaries subject to the 10-year rule, spreading withdrawals evenly across the 10 years can help minimize taxes. However, you may consider “strategic distributions” as necessary to maximize tax efficiency.

Beneficiaries should evaluate their current marginal tax rate and consider how it might change over the next 10 years. For instance, taking distributions during lower-tax years—such as periods of unemployment or early retirement—can result in significant tax savings. However, increasing your adjusted gross income could affect eligibility for financial aid, income-driven student loan payments, or Medicare premiums.

With these new changes to inherited IRA rules, beneficiaries should take a proactive approach to managing their accounts. Understanding how the new RMD requirements impact your tax situation and considering strategic distributions can help ensure you make the most of your inherited IRA while minimizing tax liabilities. Consulting with a financial advisor is a good way to develop a personalized strategy based on your specific circumstances.

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