Inherited-IRA rules create a tax timing crunch
Rules that took effect in 2025 generally require many non-spouse heirs to empty inherited IRAs within ten years, creating faster tax-triggered distributions than many families expect. With the April 15 IRA contribution deadline also looming, advisers have a timely opening to review beneficiary choices and tax timing with clients and their adult children. (el-balad.com) (morningstar.com)
A lot of families thought an inherited individual retirement account worked like a slow drip. For many adult children who inherited in 2020 or later, the clock is now much faster: the account often has to be emptied by December 31 of the tenth year after the original owner’s death. (irs.gov) The surprise is that “empty it in ten years” does not always mean “wait until year ten.” Under Internal Revenue Service rules finalized in 2024 and now applying without the earlier penalty relief, many non-spouse heirs also have to take yearly required minimum distributions during years one through nine if the original owner had already reached the age for required withdrawals. (irs.gov) (fidelity.com) That is the tax crunch. A traditional individual retirement account turns withdrawals into ordinary taxable income, so forcing money out over ten years can stack those withdrawals on top of a beneficiary’s salary, bonus, or business income in the same tax years. (irs.gov) (fidelity.com) The old “stretch individual retirement account” strategy was mostly ended by the Setting Every Community Up for Retirement Enhancement Act, which Congress passed in December 2019. Before that law, many non-spouse heirs could spread distributions over their own life expectancy, which often meant smaller annual tax hits and more years of tax-deferred growth. (fidelity.com) (schwab.com) Not everyone gets the same treatment. Spouses still have special options, and a smaller group called “eligible designated beneficiaries” — including a minor child of the owner, a disabled or chronically ill person, or someone not more than 10 years younger than the owner — can often use life-expectancy payouts instead of the standard ten-year rule. (irs.gov) (schwab.com) Roth individual retirement accounts change the tax bill but not always the timing rule. The original Roth owner does not take required minimum distributions during life, but many non-spouse heirs still must clear the inherited Roth account by the end of the tenth year, even though qualified Roth withdrawals are generally tax-free. (irs.gov) (schwab.com) This is why April matters even though inherited-account withdrawals are a December 31 issue. The Internal Revenue Service says 2025 contributions to a traditional or Roth individual retirement account can still be made up to April 15, 2026, and the 2025 contribution limit is $7,000, or $8,000 for people age 50 or older. (irs.gov 1) (irs.gov 2) That deadline gives advisers and families a natural reason to open the file and check the names on the beneficiary form. A beneficiary form can override a will for an individual retirement account, and the difference between naming a spouse, an adult child, or a trust can change how fast money must come out and who pays tax when it does. (irs.gov) (fidelity.com) The families most likely to get caught are the ones who inherited in 2020, 2021, or 2022 and heard mixed messages while the government was still sorting out the rules. The Internal Revenue Service gave excise-tax relief for certain missed inherited-account distributions in 2020 through 2024, but that temporary cushion does not make the long-term ten-year deadline disappear. (irs.gov) (fidelity.com) So the practical question in 2026 is not whether the account must come out. For many heirs, the real question is whether to spread withdrawals across several lower-income years or risk a larger lump of taxable income closer to year ten, when the Internal Revenue Service deadline is no longer theoretical. (irs.gov) (schwab.com)
