Get Ready for 2025: How New Inherited IRA Rules Will Reshape Estate and Retirement Planning

If you’ve inherited an IRA—or plan to pass one on to your heirs—2025 is a year you can’t afford to ignore. Thanks to the IRS’s final regulations under the SECURE Act, major changes are coming to how inherited IRAs are treated, especially for non-spouse beneficiaries and trusts. While many investors have grown accustomed to flexible, lifetime “stretch” provisions under the old rules, the new landscape is more compressed, more complex, and carries steep penalties for those who get it wrong.

Whether you’re a retiree with significant IRA assets or an heir wondering what these changes mean for your financial future, it’s time to get prepared. Here’s what you need to know about the updated rules and how they might impact your estate and retirement strategy.

Background: The SECURE Act and Its Slow Rollout

The SECURE Act, originally passed in 2019, fundamentally changed the rules for inherited IRAs by eliminating the stretch IRA for most non-spouse beneficiaries. While the law took effect in 2020, the IRS didn’t issue proposed regulations until 2022 and only finalized them recently. In the interim, required minimum distributions (RMDs) for inherited IRAs were waived for 2020 through 2024, giving many beneficiaries a false sense of flexibility.

But that grace period ends this year. Starting in 2025, beneficiaries—particularly non-spouses—must begin taking RMDs and prepare to distribute the full balance within a decade. Let’s break down the implications by beneficiary type.

1. IRAs Left to Individuals: New Classifications and Rules

The final regulations differentiate between two types of individual beneficiaries:

• Eligible Designated Beneficiaries (EDBs): This group includes:
  • Surviving spouses
  • Minor children of the deceased (under age 21)
  • Individuals with disabilities or chronic illnesses
  • Anyone less than 10 years younger than the deceased
• Designated Beneficiaries (DBs): Everyone else—typically adult children, siblings, friends, nieces, nephews, or grandchildren.

Here’s what that means in practice:

• EDBs still have the ability to stretch distributions over their life expectancy. This allows for more manageable, tax-efficient withdrawals.
  • Example: A surviving spouse can transfer the inherited IRA into their own name and take RMDs based on their life expectancy.
  • Minor children can stretch until age 21; then the 10-year rule kicks in and they must fully distribute the IRA by age 31.
• DBs must follow the 10-Year Rule, introduced by the SECURE Act:
  • The inherited IRA must be emptied by the end of the 10th year following the year of the original owner’s death.
  • If the deceased had already begun RMDs, the beneficiary must also take annual RMDs in years 1 through 9 based on their own life expectancy or the deceased’s, whichever is longer.

Previously, DBs could stretch distributions over their lifetime, greatly minimizing annual tax burdens and allowing assets to grow tax-deferred for decades. The new rules compress that timeline, potentially increasing tax liabilities significantly during peak earning years.

2. Special Clarifications in the Final Regulations

The recently finalized rules offer important guidance, particularly for those who inherited IRAs between 2020 and 2024:

• If you inherited from someone who had already begun RMDs, you do not need to go back and take RMDs for missed years (2020–2024). There will be no penalties for those skipped distributions.
• However, starting in 2025, you must resume (or begin) annual RMDs, and your 10-year clock will still be based on the original year of inheritance.
  • Example: If you inherited the IRA in 2021, your 10-year deadline remains December 31, 2031. You’ll take RMDs from 2025 to 2030, and fully distribute the account in 2031.
• For Roth IRAs, there are no annual RMDs for beneficiaries, but the entire balance must still be distributed within 10 years.

Penalties for missed RMDs are steep—25% of the amount not withdrawn, though this can be reduced to 10% if corrected in a timely manner. Avoiding such errors requires proactive planning.

3. IRAs Left to Trusts: More Complexity, Greater Risk

If your estate plan involves naming a trust as the beneficiary of your IRA, it’s even more important to revisit your documents in light of the SECURE Act.

There are generally two types of “see-through” trusts that can inherit IRAs:

• Conduit Trusts: Distributions flow directly from the IRA to the trust beneficiaries.
• Accumulation Trusts: Distributions can be held inside the trust for later use.

Under the old rules, if the trust met specific criteria and passed through distributions promptly, each beneficiary’s life expectancy could be used to calculate RMDs. If not, the life expectancy of the oldest trust beneficiary was used.

Now, the IRS has clarified that:

• Trusts must follow the 10-Year Rule, unless the beneficiary is an EDB.
• If the trust is structured to terminate and distribute assets immediately (such as to sub-trusts or individual IRAs), the RMD can be calculated based on each trust beneficiary’s details.
• If the trust is not a see-through trust, or the beneficiary is not a person (e.g., an estate or charity), the account must be fully distributed under the 5-Year Rule.

As David Peterson of Fidelity points out, failing to update trust documents could lead to unintended tax consequences or delays in distributions. Many attorneys now recommend customized beneficiary designations or sub-trust structures to reflect the new law and provide flexibility.

4. What to Do Now: Next Steps for IRA Owners and Heirs

Whether you’re the current IRA holder or a beneficiary, here’s what you should consider before 2025:

For IRA Owners:

• Review your beneficiaries. Are they individuals, trusts, or entities? The implications differ drastically.
• Revisit any trust documents. If you haven’t updated them since 2019, speak with an estate planning attorney as soon as possible.
• Plan for tax efficiency. The compressed distribution timeline may push your heirs into higher tax brackets. Consider Roth conversions now to reduce future tax burdens.
• Use custom beneficiary designations to split IRA assets among different types of beneficiaries based on tax impact and your wishes.

For IRA Beneficiaries:

• Understand your classification (EDB or DB) and your responsibilities.
• Track your 10-year clock. If you inherited in 2020, your final distribution must happen by the end of 2030, regardless of when RMDs begin.
• Prepare to take RMDs starting in 2025, if applicable, and set reminders to avoid penalties.
• Work with a financial advisor or CPA to determine how distributions will affect your taxable income and financial plan.

Conclusion: The 2025 Wake-Up Call for Inherited IRA Planning

The grace period is over. As 2025 approaches, beneficiaries and IRA owners alike must shift from passive observation to proactive planning. The IRS is now enforcing the full implications of the SECURE Act, and that means the time for updates, adjustments, and in some cases, damage control, is now.

Inherited IRA rules are complex and highly individualized. Working with a qualified financial advisor, estate attorney, or tax professional is no longer optional—it’s essential.

Take the time to get your plan in order. Your future self—or your heirs—will thank you.