Getting an inheritance can leave you flush with cash. But if you aren’t careful, it also could soon put you in hot water with the IRS.
This year, the federal agency will finally crack down on folks who inherit an IRA and do not take their required minimum distributions. The IRS didn’t enforce the penalty from 2020 through 2024, but that leniency has ended as of 2025.
The Secure Act of 2019 mandated that heirs must withdraw all money from an inherited IRA within 10 years of the original account holder’s death. Prior to this rule, those who inherited an IRA could slowly withdraw the money over their remaining lifetime, which was a boon for heirs who wanted to keep taxes low from year to year.
In addition, some heirs — although not all — who are subject to the 10-year rule now must also take annual withdrawals from their inherited IRAs. These withdrawals are known as required minimum distributions, or RMDs.
Although the Secure Act changed the withdrawal rules, the IRS is only now enforcing the new guidelines. And this is one deadline you should not ignore, as the penalty for failing to make all RMDs on time and according to the proper schedule can soar to 25% of the amount you should have withdrawn, although the fee may be reduced for those who correct the situation within two years.
Typically, the deadline for making an RMD is Dec. 31 of the applicable year. So, if an heir is required to withdraw from an inherited IRA for the 2025 tax year, the deadline would most likely be Dec. 31, 2025.
It is important to note, however, that some heirs do not have to take RMDs at all. Spouses, minor children, and disabled or chronically ill folks likely do not have to withdraw the money from an inherited IRA according to the terms of the 10-year rule. If you think this exception might apply to you, talk to a tax professional or other expert to make sure you are exempt.
Those who must withdraw their money within a decade also should consider consulting with a tax professional. Making large withdrawals during years when your other income is especially high could result in higher tax bills.
Large withdrawals also could impact everything from whether you are eligible for a premium tax credit in the health insurance marketplace to how much you pay in Medicare premiums and Social Security taxes.
Everyone’s financial situation is different, however, so what is right for you might be a mistake for someone else and vice versa. Creating a long-term withdrawal strategy with a tax pro can be the best way to keep your tax bill as low as possible.
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