The Inheritance That Comes With a Deadline

Most people who inherit an IRA think they have ten years to do whatever they want with it. Eddie and Betty walk through why that assumption is wrong for a lot of families, and why 2025 is the first year it truly costs them: the SECURE Act's ten-year rule, the annual withdrawal requirement most people never hear about, the penalty relief that just ended, and what to actually do if you've inherited a traditional IRA in the last few years.

Read the full article: https://news.americanretirementadvisors.com/inherited-ira-ten-year-deadline/

American Retirement Advisors helps families in Arizona and Nevada navigate healthcare, retirement income, and inheritance planning. Want to reach out? Text us at (602) 281-3898, email support@americanretire.com, or visit americanretirementadvisors.com.

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SPEAKER_00 0:01

Welcome to the American Retirement Advisor, coming to you from One to Three Z Studios. Real stories, real strategies, and straight talk about healthcare, retirement income, and inheritance planning. I'm Ian Schaefer, joined with Eddie and Betty. Let's get into it.

SPEAKER_03 0:16

Welcome back to the American Retirement Advisor. I'm Betty, and Eddie is here with me in the studio today, and I'm really glad he is, because what we're getting into is one of those topics that sounds straightforward until it absolutely isn't. We're talking about inherited IRAs. Specifically, what happens when an adult child inherits one from a parent, and why 2025 is the year that the rules finally have real teeth. This comes out of a piece written by Ian Schaefer, our company's COO, and I've been thinking about it all week.

SPEAKER_01 0:49

Thanks for having me in on this one. And I want to say up front, he frames it really well because he writes from a personal vantage point. He sits in on meetings his father, who is the advisor, has with families. So he's not describing this from a textbook, he's watching real people get surprised in real time. And that's exactly the perspective that makes this worth paying attention to.

SPEAKER_03 1:13

He opens with a scene that I think every listener can picture. A parent has passed, there's grief, there's an IRA with the son's or daughter's name on it, sometimes a few hundred thousand dollars. And almost every time the adult child says the same thing. I've got 10 years to figure out what to do with this, right? And his answer is sort of.

SPEAKER_01 1:35

That sort of is doing a lot of work in this article, and it's worth unpacking slowly. The 10-year rule itself is real. It came in with the Secure Act in 2019. If you're an adult child inheriting a traditional IRA from a parent, you don't get to stretch withdrawals across your own lifetime the way your parents' generation could. The account has to be at zero by the end of year 10. That part most people have heard.

SPEAKER_03 2:02

So where does the sort of come in? Because I think a lot of folks hear 10 years and their brain fills in, okay, I've got a decade. I can park this and deal with it later. Maybe take it all out in year 10 when I feel like it.

SPEAKER_01 2:16

Right. And that assumption is what Ian Schaefer calls the trap. Whether you can coast for nine years and decide at the end depends entirely on one question that most people never think to ask. Was the person you inherited from already taking required withdrawals from their IRA? Because once someone hits age 73, the government requires them to start drawing down a traditional IRA every year. Those are called required minimum distributions. If your parent was already doing that, the rules say you have to keep the money moving too. You owe a withdrawal in year one, year two, all the way through year nine. And then you still have to empty whatever's left by end of year 10.

SPEAKER_03 2:58

So when the parent was already in that distribution phase, it's not really a 10-year window at all. It's nine years of required annual withdrawals and then a hard deadline. That's a very different picture than I have a decade to decide.

SPEAKER_01 3:13

It really is. And the people Ian Schaefer describes walking into these meetings almost never know that going in. Now there is a break if the person died before they had started those required withdrawals. In that case, no annual requirement, just the 10-year finish line. But the most common case, an adult child inheriting from a parent who was already in their late 70s or 80s and well into their required distributions, the yearly requirement is absolutely on.

SPEAKER_03 3:39

Which brings us to the 2025 piece of this, and this is where the article really got my attention. Because it sounds like people have technically been operating under this rule for a while, but there was a kind of grace period.

SPEAKER_01 3:51

That's a fair way to put it. When the Secure Act changed things in 2019, even the tax world wasn't sure exactly how the annual withdrawal requirement worked for inherited IRAs. So the IRS did something unusual. It waived the penalty for missing those yearly withdrawals, and it did that for four consecutive years, 2021 through 2024. That's four years where you could have missed a required annual withdrawal and faced no penalty for it.

SPEAKER_03 4:18

So a lot of people probably just didn't know the clock was running at all because there were no consequences yet.

SPEAKER_01 4:24

Exactly. And Ian Schaefer is direct about this. He says, if this is the first you're hearing of it, you're in good company, and it's not entirely your fault. But the IRS finalized its regulations on this in the summer of 2024, and the free pass ended there. Starting with 2025, the annual withdrawals are real, and skipping one carries a penalty. The article notes the penalty used to be 50% of the amount you should have taken. A recent law softened that to 25% and as low as 10% if you catch it and fix it quickly. Better than 50%, but that's still a meaningful hit on a mistake you might not have even known you were making.

SPEAKER_03 5:02

A 25% penalty on money you were supposed to take out, but didn't. And you didn't take it out because nobody told you that you were required to. That's a genuinely painful situation to be in.

SPEAKER_01 5:13

It is, and it's what makes Ian Schaefer's point about 2025 feel urgent rather than just informational. If you inherited a traditional IRA in the last few years from a parent who was already in their required distribution phase, you need to be asking right now whether you've been taking annual withdrawals, because the pass is gone. And if the answer is no, that's a conversation to have with an advisor immediately, because how you handle a missed distribution has its own rules and timelines.

SPEAKER_03 5:43

I want to make sure listeners understand what we mean by traditional IRA here, because the article does draw a distinction. What happens if what you inherited is a Roth?

SPEAKER_01 5:52

Much friendlier situation. The big tax story is different too, but that's a conversation for another day. The annual withdrawal trap Ian Schaefer is describing is really a traditional IRA problem.

SPEAKER_03 6:23

The article also mentions that not everyone is even on the 10-year clock. Surviving spouses have different options entirely, and there's a handful of other exceptions: people who are chronically ill or disabled, or someone who isn't more than 10 years younger than the person who passed. So the 10-year rule is the general rule for adult children, but it's not universal.

SPEAKER_01 6:44

Right. This surviving spouse situation in particular is its own category with its own generally more favorable choices. Ian Schaefer flags those groups, but doesn't go deep on the specifics. And honestly, the rules there vary enough by circumstance that I'd put that on the list of things to bring directly to one of our advisors at American Retirement Advisors. Because the answer really does depend on your individual situation.

SPEAKER_02 7:09

Let's talk about the part of this that Ian Schaefer says families actually lose sleepover, because he makes clear it isn't the penalty itself, it's the tax bill.

SPEAKER_01 7:19

This is the heart of the whole piece, in my view. Every dollar that comes out of a traditional inherited IRA counts as ordinary income to you in the year you take it. So if you ignore the account for nine years and then pull the entire balance out in year 10, you're stacking all of that income into a single tax year. You can push yourself into a much higher bracket, you can affect what you pay for Medicare, and you end up handing a portion of that inheritance to the IRS that thoughtful spread-out planning would have kept for you.

SPEAKER_03 7:51

He shares a real example of this in the piece: someone who had inherited a sizable count, had no idea the annual withdrawals applied to her, had been planning to just let it sit. And when they mapped the withdrawals out thoughtfully across the 10 years instead, lined up against her other income, the difference was significant.

SPEAKER_01 8:10

And that's the planning insight that the article is really pointing toward. It's not a question of whether you pay tax on this money. You will. It's a question of when you pay it, how much, and whether the timing collides with other income in a way that makes it worse than it had to be. If you're working and in a high-income year, maybe you take less that year. If you retire and your income drops, maybe that's the year you take more. The 10-year window can be a planning tool if you treat it that way from the beginning.

SPEAKER_03 8:39

So the person who waits until year nine or ten to think about this has actually given away all of that flexibility.

SPEAKER_01 8:46

All of it. The window closes whether you use it well or not. And the people who use it well are the ones who looked at it early, looked at it against the rest of their financial picture, their other income, their tax bracket when they plan to retire, and built a withdrawal schedule on purpose rather than getting to year 10 and just pulling whatever's left in a lump.

SPEAKER_03 9:06

Ian Schaefer gives three concrete things he says are worth doing now, not in year nine. Walk me through those because I think they're practical and people can write them down.

SPEAKER_01 9:15

The first is to find out whether the original owner had already started their required withdrawals. That single fact determines whether the yearly requirement applies to you. If you don't know the answer to that, find out. Second, if the annual requirement does apply, make sure you've taken this year's distribution. The grace period is over and 2025 counts. Third, before you decide anything about the rest of the money, look at it alongside your full financial picture. Other income, tax bracket, retirement timeline. That's the work that protects the inheritance.

SPEAKER_03 9:49

That first step sounds simple, but I think a lot of people genuinely might not know the answer. If your parent passed and you just received the account information, knowing whether they were already in their required distribution phase isn't necessarily something you'd automatically have.

SPEAKER_01 10:05

You might have to ask the financial institution holding the account, or look at your parents' prior tax returns, or talk to whoever was helping them with their finances. The custodian of the IRA should have records of whether distributions were being taken. It's a question worth asking specifically, not just assuming one way or the other. And if you're not sure how to interpret what you find, that's a question for an advisor who handles this regularly. The exact mechanics of confirming distribution status, how that flows into calculating what you owe for the year, that's something our team at American Retirement Advisors works through with families all the time.

SPEAKER_03 10:41

I want to go back to something Ian Schaefer writes near the end of the article, because it's the reason he says he wrote it at all, and it stayed with me. He says his father has spent a career sitting across from families and walking them through exactly this. But his father can only do it one family at a time. So Ian writes, so the next family gets the heads up before the mistake, not after.

SPEAKER_01 11:04

That framing matters because this isn't an abstract tax question. These are people who just lost a parent. The IRA is the last thing that parent was able to leave them. And walking into a completely avoidable tax penalty or a needlessly large tax bill because of a deadline they never knew existed, that's a real loss on top of a loss. The whole point of understanding this is to protect what was left for you.

SPEAKER_03 11:32

He closes the piece with a line that I thought was just exactly right. He says, an inheritance isn't really about the account balance. It's the last thing someone who loved you was able to hand you. And the kindest thing you can do with it is make sure a deadline they never knew about doesn't quietly take a piece of it.

SPEAKER_01 11:50

That's the whole case for doing this planning deliberately. That obligation exists whether you know about it or not. The penalty applies whether you knew about it or not. But the tax outcome, whether you spread this thoughtfully or stack it all in one year, that's inside your control if you start early. That's the piece that planning changes.

SPEAKER_03 12:11

So if you're listening and you've inherited a traditional IRA in the last few years, or you know one might be coming, or you're a parent who wants your kids to not be blindsided by exactly this situation someday, this is the moment to have a real conversation with someone who knows these rules in depth. Not in year nine, now, while the window is still useful. Our team at American Retirement Advisors is exactly the place to start that conversation. And we'd love to help you think it through.

SPEAKER_01 12:40

A quick note before we wrap up: today's episode covers financial topics for educational purposes only. American Retirement Advisors does not provide tax or legal advice. Please consult a CPA or tax professional before making any decisions based on what you heard today.

SPEAKER_03 12:59

This is Betty with the American Retirement Advisor. Thanks for listening. If this episode helped you think differently about your retirement, share it with someone who needs to hear it. You can read the full article and browse hundreds more at AmericanRetire.com. Want to reach out? You can text us at 602-281-3898. Or email support at AmericanRetire.com. Be sure to subscribe so you never miss an episode. We publish daily. See you next time.

SPEAKER_00 13:32

Thanks, Eddie. Thanks, Betty. Until next time. This is Ian Schaefer coming to you from 123Z Studios. I hope you've enjoyed this recording of the American Retirement Advisor, where we make healthcare, income, and inheritance planning 23 Easy.