The Inheritance Plot Twist: New Rules for Retirement Accounts

If you inherited a retirement account after 2020, it’s time to pay attention to the fine print—because the IRS is watching. Starting January 1, 2025, new rules around required minimum distributions (RMDs) kick in, and they’re not just guidelines; they’re non-negotiable.

Here’s the deal: If the person who left you the account was already taking RMDs before their passing, the IRS now expects you to pick up where they left off. That means you’ll need to start withdrawing a minimum amount annually, calculated based on the account's value and your age. This is in addition to the overarching rule that you must fully withdraw the account’s balance within 10 years of inheriting it. Miss an RMD, and you’ll face penalties of up to 25% of the amount you should have withdrawn. Yep, the IRS is serious about this one.

Not everyone has to follow the same playbook. If the original account holder wasn’t yet taking RMDs, the annual withdrawal rule doesn’t apply to you. You can manage your withdrawals however you’d like—as long as you empty the account by the end of that 10-year window. Sounds more flexible, right? Just don’t fall into the trap of thinking you’re off the hook entirely. The 10-year rule remains in play, no matter the circumstances.

For non-spouse beneficiaries, like adult children, siblings, or friends, this is where things get sticky. You’re on the hook for following these new rules to a tee. But if you’re a spouse, minor child, disabled, or chronically ill, the rules might be a bit more forgiving, and you could qualify for exceptions.

The bottom line? Treat inherited retirement accounts with care and precision. Navigating annual withdrawal requirements (if they apply to you) and staying on top of the 10-year deadline is crucial to avoiding costly mistakes. A small oversight could turn your inheritance into a tax headache, and no one wants their legacy tied up in penalties.

To ensure you're making the most of your inheritance and staying compliant with IRS rules, contact our office today. We’ll guide you through every step of the process, so you can confidently preserve what’s been passed down to you.