The 2025 Rule Change for Inherited IRAs That Could Trigger a 25% Penalty
Aug. 18, 2025
The clock is ticking for IRA beneficiaries as significant changes to inherited IRAs are scheduled to take effect in 2025. Tucked within the legislation are new compliance requirements, and one misstep could slap an unprepared beneficiary with a hefty 25% tax penalty. Whether you’ve recently inherited an IRA or anticipate doing so, understanding these changes isn’t just helpful—it’s vital to protecting your financial future.
This blog post outlines the details of the 2025 rule change, who’s most affected, and the steps you can take to avoid penalties. By understanding what lies ahead, you can manage tax implications more effectively and safeguard your inheritance.
What Is an Inherited IRA?
An inherited IRA, also known as a beneficiary IRA, is an account established when a person inherits money from a deceased individual's IRA. Beneficiaries can be individuals, trusts, estates, or charitable organizations, depending on how the account was set up by the original owner.
Previously, inherited IRA beneficiaries had more flexibility in drawing funds, with many taking advantage of the "stretch IRA" strategy, which allowed them to withdraw funds over their lifetime to minimize annual tax burdens. However, major changes introduced by the SECURE Act of 2019 began to phase out this option, instead instituting a 10-year withdrawal rule for most non-spouse beneficiaries.
The upcoming 2025 rule change adds another layer of complexity—and a costly penalty if the rules aren’t followed.
Breaking Down the 2025 Rule Change
The 2025 rule change imposes stricter regulations on the timing of withdrawals for inherited IRAs. Prior to this, many beneficiaries assumed they had complete freedom to wait until the end of the 10-year period to fully distribute the account. However, the new rules require specific Required Minimum Distributions (RMDs) annually during that 10-year window, depending on when the original account holder passed away.
The consequences of failing to meet these RMDs? A 25% "excess accumulation" penalty on the amount that should have been withdrawn. This is an alarming figure, especially compared to the 50% penalty that existed before changes made in late 2022 under SECURE 2.0 (reducing the penalty to a still-daunting 25%, or 10% if corrected promptly).
Who Does This Affect?
Non-Spouse Beneficiaries
The largest group impacted by the rule change is non-spouse beneficiaries, such as children, siblings, or other relatives of the deceased account holder.
Beneficiaries Subject to the 10-Year Rule
If the original IRA owner passed away after January 1, 2020, and you’re required to follow the 10-year withdrawal rule, you’re directly affected by the new RMD requirements.
Individuals Rebuilding Plans Post-SECURE Act
Anyone who inherited an IRA before fully understanding the new framework post-SECURE Act may face challenges aligning their withdrawal strategies with this future amendment.
Financial Implications of Non-Compliance
The potential tax penalty is no small number. For instance, if your inherited IRA has an RMD of $20,000 for a given year and you fail to withdraw that amount, you could face a $5,000 penalty (25% of the missed distribution). Multiply mistakes over a few years, and the penalties quickly balloon.
Beyond the immediate penalties, missed RMDs can snowball into more significant tax consequences. The longer funds remain in the account against distribution requirements, the larger the penalty, and the higher your taxable income may climb in the years you need to catch up on withdrawals.
How This Could Play Out
Scenario 1
Sarah inherits a $400,000 IRA after her father’s passing in 2021. She assumes she can manage withdrawals however she likes during the 10-year period and delays taking distributions. By 2025, she learns she should have withdrawn RMDs annually and faces penalties for the missed distributions from 2023 and 2024. With each year carrying an RMD of $15,000, she’s on the hook for $7,500 in penalties (25% of $30,000).
Scenario 2
James, also a beneficiary, correctly withdraws his RMDs in 2023 and 2024. However, a lack of planning raises his taxable income, pushing him into a higher tax bracket. While he avoids penalties, he shoulders a heavier tax burden simply because he neglected to account for the cumulative impact of withdrawals.
How to Navigate These Changes
Facing the 2025 rule change may feel daunting, but the right strategies can help you stay compliant and avoid penalties. Here’s how to safeguard your finances:
1. Understand Your Responsibilities as a Beneficiary
Each inherited IRA situation is unique. Know whether you’re subject to the 10-year rule, and consult with a financial advisor to clarify your obligations around RMDs.
2. Track and Calculate Your RMDs
Don’t leave RMD calculations to chance. An annual review of your account’s balance
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