Inherited IRAs: New Tax and Distribution Rules for 2025

Inheriting an Individual Retirement Account (IRA) can be a significant financial opportunity, providing you with a source of income for years to come. However, the rules governing inherited taxes have undergone significant changes in recent years. These changes have both simplified and complicated matters, making it crucial for beneficiaries to understand the new inherited IRA tax rules for 2025 and their tax implications. At Steward Ingram & Cooper, PLLC, our Raleigh area CPAs are committed to helping inherited IRA beneficiaries navigate this complex financial landscape, ensuring you make the most of your Inherited IRA.

Understanding Inherited IRA Tax Rules in 2025

To understand inherited IRA tax rules, we’ll begin with explaining how withdrawals are handled. Withdrawals from a traditional inherited IRA are taxed as ordinary income at your marginal tax rate, making it essential to grasp the inherited IRA tax implications to optimize your tax planning. Knowing the tax on inherited IRA withdrawal can help you minimize your tax burden effectively.

Example Tax Calculations for Inherited IRAs

Inherited IRA tax rules can be difficult to grasp. To help you understand the tax impact of inherited IRA withdrawals in 2025, here are some example calculations based on the current federal tax brackets. These scenarios assume a traditional IRA with no additional income or deductions.

• Example 1: Single Filer, $50,000 Withdrawal
  – Taxable amount: $50,000
  – 10% on $11,600 = $1,160
  – 12% on $35,550 ($47,150 – $11,600) = $4,266
  – 22% on $2,850 ($50,000 – $47,150) = $627
  – Total tax: $1,160 + $4,266 + $627 = $6,053
  – Effective rate: ~12.1%
• Example 2: Married Filing Jointly, $100,000 Withdrawal
  – Taxable amount: $100,000
  – 10% on $23,200 = $2,320
  – 12% on $70,100 ($94,300 – $23,200) = $8,412
  – 22% on $5,700 ($100,000 – $94,300) = $1,254
  – Total tax: $2,320 + $8,412 + $1,254 = $11,986
  – Effective rate: ~12%
• Example 3: Single Filer, $200,000 Withdrawal
  – Taxable amount: $200,000
  – 10% on $11,600 = $1,160
  – 12% on $35,550 = $4,266
  – 22% on $53,375 ($100,525 – $47,150) = $11,742.50
  – 24% on $91,425 ($191,950 – $100,525) = $21,942
  – 32% on $8,050 ($200,000 – $191,950) = $2,576
  – Total tax: $1,160 + $4,266 + $11,742.50 + $21,942 + $2,576 = $41,686.50
  – Effective rate: ~20.8%

These examples show how larger withdrawals can push you into higher tax brackets, emphasizing the importance of strategic distribution planning. Consult a tax professional for personalized advice.

2025 Federal Tax Brackets

• 10%: $0–$11,600 (single) / $0–$23,200 (married filing jointly)
• 12%: $11,601–$47,150 / $23,201–$94,300
• 22%: $47,151–$100,525 / $94,301–$201,050
• 24%: $100,526–$191,950 / $201,051–$383,900
• 32%: $191,951–$243,725 / $383,901–$487,450
• 35%: $243,726–$609,350 / $487,451–$731,200
• 37%: Over $609,350 / $731,200

Large withdrawals can push you into a higher bracket, so consider spreading them out over time.

Inherited IRA Distribution Rules for 2025

Inherited Individual Retirement Accounts (IRAs) represent a unique subset of retirement savings vehicles that individuals may receive as beneficiaries after the original account holder’s passing. Understanding the inherited IRA distribution rules is essential to making informed decisions and maximizing their benefits. The rules for inherited IRA have evolved with the Setting Every Community Up for Retirement Enhancement (SECURE) Act and its updates.

Types of Inherited IRAs

There are several types of Inherited IRAs, each with its own set of rules and considerations:

• Inherited Traditional IRA: When you inherit a Traditional IRA, you are typically required to take required minimum distributions (RMDs) based on your life expectancy or the “10-year rule,” depending on the circumstances. These distributions are subject to income tax.
• Inherited Roth IRA: Inheriting a Roth IRA offers unique advantages, as qualified distributions from Roth IRAs are typically tax-free. Beneficiaries may need to take RMDs but can enjoy tax-free growth and withdrawals.
• Inherited SEP IRA or SIMPLE IRA: These Inherited IRAs follow rules similar to Inherited Traditional IRAs, with beneficiaries required to take RMDs based on life expectancy or the “10-year rule.” Taxation depends on the original contributions’ tax status.
• Inherited Beneficiary IRA: In some cases, beneficiaries may have the option to set up a separate Inherited Beneficiary IRA to manage and distribute the inherited funds. This can provide flexibility in managing distributions and taxes.
• Inherited Non-Spousal IRA: Non-spouse beneficiaries, such as children or other family members, often have different inherited IRA beneficiary rules and options compared to spousal beneficiaries. Understanding these distinctions is crucial when managing an inherited IRA.

The Inherited IRA 10-Year Rule

The SECURE Act eliminated the “Stretch IRA” for most non-spouse beneficiaries, replacing it with the inherited IRA 10-year rule. You must distribute the entire Inherited IRA balance within ten years of the original account holder’s death in 2025. If the owner had reached age 73, annual RMDs are required during this period based on your life expectancy.

Inherited IRA RMD Rules

Annual RMDs for 2025 are calculated using your life expectancy from IRS Table I. For example, a 50-year-old with a $200,000 IRA and a factor of 36.2 must withdraw at least $5,525. Missing an RMD incurs a 25% penalty, reduced to 10% if corrected within two years.

Benefits and Flexibility of Inherited IRAs

Inherited IRAs offer several benefits to beneficiaries:

• Tax-Advantaged Growth: An inherited IRA can continue to grow tax-deferred or tax-free, depending on the type, allowing the account to potentially increase in value over time.
• Income Stream: Beneficiaries can receive regular distributions from the Inherited IRA, providing a reliable source of income that can supplement their financial well-being.
• Flexibility: Depending on the IRA type and beneficiary’s age, there may be flexibility in how and when distributions are taken, allowing for customized income strategies under the inherited IRA withdrawal rules.

Real-Life Example: Managing an Inherited IRA

Meet John, a 48-year-old who inherited a $250,000 traditional IRA from his uncle in 2025. His uncle had reached age 73, so John must take annual RMDs and empty the account by 2035. With a life expectancy factor of 37.1, his first RMD is about $6,735, taxed at his 22% marginal rate, costing $1,482. John plans to withdraw extra in a low-income year to stay in a lower bracket.

Tax Planning Strategies for Inherited IRAs

To minimize the inherited IRA tax implications, consider spreading withdrawals over the 10-year period to avoid higher tax brackets or taking larger distributions in lower-income years. Be mindful of 2026, when tax rates may increase after the Tax Cuts and Jobs Act expires. Consult a tax professional for personalized strategies.

FAQ: Common Questions About Inherited IRAs

What Are the Inherited IRA Withdrawal Rules?

Withdrawal rules depend on your beneficiary status. Non-spouse beneficiaries typically have 10 years to withdraw all funds, with annual RMDs if the original owner had reached age 73. Spouses can roll the IRA into their own account or take life expectancy distributions.

Are There Penalties for Missing Inherited IRA RMDs?

Yes, missing an RMD in 2025 incurs a 25% penalty on the amount you should have withdrawn, reduced to 10% if corrected within two years. Always verify your RMD with your custodian.

Can I Avoid Taxes on an Inherited IRA?

With a traditional IRA, withdrawals are taxable, but Roth IRA withdrawals may be tax-free if the account meets the five-year rule. Strategic timing can help minimize your tax burden.

Contact Our Inherited IRA Tax Planning Professionals in Raleigh

Ready to navigate the complexities of inherited IRA tax rules and planning with confidence? Look no further than the team of tax planning CPAs at Steward Ingram & Cooper, PLLC. Our CPAs are always up-to-date on the latest inherited IRA tax rules and can help you calculate yours. Don’t let uncertainty about taxes on your inherited IRA hinder your financial goals.

Get started now by calling us at  (919) 872-0866 or filling out the contact form below.