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Tax Strategies for an Inherited IRA

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Starting 2025, new regulations for beneficiaries of inherited IRAs will go into effect. It’s important to be up to date on the rules, as they can have a significant impact on your tax strategy. There are also penalties involved if you do not follow the rules as specified by the IRS.


Since 2020, the 10-year rule has been in effect if a beneficiary inherits the IRA account following the death of the account owner after 2019 under certain circumstances. If the beneficiary is the account holder’s spouse, then the 10-year rule may be imposed if they decide to keep the IRA as an inherited account. If the beneficiary is not the account owner’s spouse, and they do not fall under “eligible designated beneficiary” requirements, then the only option they have is the 10-year rule.


The 10-year rule means that the beneficiary must empty the account “by the end of the 10th year following the year of the account owner's…death”. This rule can end up costing you a lot in taxes, especially since lower tax rates from the Tax Cuts and Jobs Act expire next year. Some strategies to keep in mind during the 10 years are taking advantage of current lower tax rates, and making regular distributions over the 10 years to keep income tax at a minimum. Still though, even more rules could impact your strategy.


In addition to the 10-year rule, though the IRS previously waived penalties, yearly required minimum distributions will need to be taken starting 2025. If you fail to withdraw the full calculated minimum distribution or miss it altogether, the IRS will impose a 25% penalty on the amount that should have been distributed. It is possible to reduce this 25% penalty to 10% if the required minimum distribution is “timely corrected”.


Navigating these regulations for inherited IRAs can be a bit confusing, and severe tax consequences can result from poor strategizing. It’s best to have a retirement and tax professional by your side to maximize tax savings. If you currently do not have an expert you can trust, reach out to XQ CPA. Our team of Certified Tax Coaches would love to give you the right guidance. Give us a call or make an appointment at the link below.


Phone: 832-295-3353


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Want to pay less taxes? Read XQ CPA's official tax planning guidebook! How to Grow Your Wealth Through Tax Planning.

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