Inherited IRA rules changed. Don’t get mired in high taxes, penalties

Medora Lee, USA TODAY

Wed, February 18, 2026 at 7:01 PM GMT+9 4 min read

Inheriting money is often welcome, but if it’s a retirement account, beneficiaries need to be aware of new rules effective in 2025 or end up potentially paying a steep penalty to the IRS.

New rules around inherited individual retirement accounts (IRAs) – both traditional and Roth – were passed in 2019, but the IRS gave Americans a grace period from 2020 through 2024 as the laws were crystallized. In July 2024, the agency issued final regulations, which means they kicked in last year for retirement accounts inherited in 2020 or later.

If Americans don’t pay attention, they could face a 25% penalty or a tax bomb in upcoming years.

“There are many things people should know if they inherit an IRA," said Mark Steber, chief tax information officer at tax preparer Jackson Hewitt. "Arguably the most important? Understand that you may owe taxes sooner or later on the money inherited.”

What are the rules on inherited IRAs?

10-year rule: Unless you’re a surviving spouse, a minor child, have a disability or are chronically ill, or are a person less than 10 years younger than the retirement account owner, you’ll have to empty an inherited individual retirement account (IRA) within 10 years, even if it’s a Roth IRA.

Required minimum distributions, or RMDs: If the original owner of a traditional IRA account had started taking annual RMDs, you’ll have to continue the annual withdrawal, too. The RMD must be taken by the end of the calendar year so, the 2025 distribution had to have been made by Dec. 31, 2025. If the original owner hadn’t started taking RMDs, then the beneficiary isn’t required to take annual ones either.

Since Roth IRAs don’t require RMDs, beneficiaries don’t have to take them.

What if I missed the RMD deadline?

If you miss a RMD, you could face a 25% penalty on the amount that should have been withdrawn, the IRS said. The penalty can be reduced to 10% "if the RMD is timely corrected within two years,” the IRS said.

So if you forgot or weren’t aware you had to take a RMD by the end of last year, you should take it as soon as possible and file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts with your 2025 federal tax return, the agency said.

Sydney Teng, 24, poses for a portrait at the offices of Evergreen Health, the health care non-profit where she works. Teng is already investing in a 401(k), contributing 6% of her roughly $50,000 salary to the retirement savings account. The money deducted from her regular paycheck is invested in a target-date fund that eyes retirement around the age of 67. The fund is 90% invested in stocks.

How are inherited retirement accounts taxed?

Any amount withdrawn, including RMDs, from an inherited, traditional IRA is taxed as ordinary income. A RMD could push beneficiaries into higher tax brackets, especially if there are multiple years’ worth of withdrawals that need to be taken in a short period of time.

Inherited Roth IRA distributions are free of taxes and RMDs as long as the account has been open at least five years.

 






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Can people withdraw more than the RMD amount?

Heirs can withdraw more than the required amount each year.

Vanguard encourages most beneficiaries to take equal distributions over the 10 years to liquidation to “take advantage of lower tax brackets each year and avoid creeping into higher tax brackets. The overall difference in taxes can be meaningful while also allowing for some continued tax-deferred growth,” the investment management firm said in a study.

By taking only the minimum each year and then a balloon balance at the end to meet the 10-year cap could mean much of the IRA money could end up taxed at a higher rate.

There are exceptions, Vanguard said, including:

Taxpayers already in the highest tax bracket may not have opportunities to pay at a lower tax rate.

Those with fluctuating incomes may want to time larger withdrawals in years of lower funds. “If you know you will be getting a big bonus in 2026, maybe you don’t take a distribution that year,” said Jonathan Fishburn, a tax-and-estate specialist with not-for-profit TIAA’s wealth planning strategies group, in a blog. “If you know you won’t be getting one, maybe you do.”

Consider if an income bump would affect qualifying for specific tax deductions or tax credits, student loans or result in higher Medicare costs from the income-related monthly adjustment amount.

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.

This article originally appeared on USA TODAY: Inherited IRA rules changed in 2025. How to avoid taxes and penalties

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