Inherited an IRA? Suze Orman Warns This New IRS Rule Could Cost You Big
Written by
Laura Bogart
Edited by
Kristen Mae
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When navigating a loss, the emotional toll can be overwhelming, and it can take a minute to even think about handling the practical side of things, like understanding how to manage the financial assets you may inherit. You may be aware that you can inherit bank accounts, real estate and even personal collectibles, but you might not know that you can inherit a loved one’s retirement accounts, including an IRA. That is, until you realize your loved one has left one to you.
Fortunately, financial expert Suze Orman has her finger on the pulse of all things personal finance. She recently highlighted a new rule that anyone who has inherited an IRA should be aware of, and she discussed it in a recent “Money Mondays with Suze” episode.
“If you inherited an IRA from someone who passed away in 2020 or later, an important new IRS rule has kicked in beginning in 2025 that you need to pay attention to,” she wrote.
The New Rule Explained
Orman explained that since 2020, beneficiaries have been subject to a “10-year rule” for inherited IRAs, which requires them to have withdrawn all the funds from the account by the 10th year after the original account holder’s death.
Starting in 2025, though, beneficiaries will be required to take annual withdrawals during the 10-year period – and they’ll face penalties if they don’t.
This new rule represents a significant shift from the old way of doing things, which allowed heirs to withdraw from their inherited IRAs over the course of their lifetime, helping to reduce their yearly income taxes. Beneficiaries were only required to take the usual annual required minimum distributions (RMDs) based on their age.
“There has been a lot of confusion about whether people subject to the new 10-year rule also need to take annual RMDs until they have emptied their inherited IRA,” she explained. “The answer is yes. Beginning in 2025, if you inherited an IRA from someone who passed in 2020 or later, you likely need to take an RMD this year, and every year until you have withdrawn all the money from the IRA.”
There Are Exceptions
Some beneficiaries are exempt from the new rules. These include surviving spouses, children under the age of 21, people who are no more than 10 years younger than the deceased, or those who are disabled or chronically ill.
Orman emphasized that if you fall into any of these categories, you have more options regarding the timing of your withdrawals from an inherited IRA. She also recommends consulting with a trusted tax professional to get tailored advice on how to proceed.
Other Details to Consider
If there’s one thing Orman wants to stress, it’s that you absolutely must withdraw 100% of the funds no later than the 10th anniversary of your loved one’s passing. Missing an annual RMD for your inherited IRA could result in a penalty of 25% of the RMD amount that you should have taken.
And, in case you were wondering, an inherited Roth IRA also falls under these rules.
Orman suggests working with the financial institution holding the IRA to determine your RMD, and collaborating with a tax professional to answer any questions you may have.
She also wants you to be aware that you can withdraw the funds faster if you choose. You’ll need to adhere to the 10-year rule only if you want to keep the money in your account for that entire period.
“I want to be very clear, the minute you inherit an IRA, the money is 100% yours, and you can do whatever you want. If you want to withdraw the money faster, you can,” she said.
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