Heirs who inherited individual retirement accounts after 2019 and skipped annual withdrawals during the IRS transition period now owe those distributions starting in 2025, or they face a 25% excise tax on every dollar they failed to take out. The penalty applies to non-spouse beneficiaries who fall under the 10-year drawdown rule but did not realize they also had to pull money out each year along the way. With the grace period officially closed, the first real enforcement year is already underway.
Annual withdrawal rules for inherited IRAs kick in for 2025
The IRS published final required minimum distribution regulations in Internal Revenue Bulletin 2024-33, and those amended rules apply to calendar years beginning on or after January 1, 2025. That date marks the end of several years of transition relief during which the agency waived penalties for beneficiaries who did not take yearly distributions from inherited accounts. Before this final rule, many heirs reasonably believed they could simply empty the account by the end of the tenth year after the original owner’s death, spacing withdrawals however they chose. The regulations now confirm that when the original account holder died on or after the required beginning date for their own distributions, non-spouse heirs must take annual amounts based on life expectancy tables, then drain whatever remains by year ten.
The Government Accountability Office classified the Treasury decision labeled TD 10001 as a major rule after its Federal Register publication on July 19, 2024, signaling broad economic impact across millions of inherited retirement accounts. Certain beneficiaries are exempt from the annual pull requirement: a surviving spouse, a minor child of the account owner, and other eligible designated beneficiaries can still stretch distributions over their own life expectancy, according to IRS guidance on RMD rules for beneficiaries. Everyone else who inherited after 2019, however, must now comply with yearly withdrawals or pay the price.
How the 25% penalty works and when it drops to 10%
Under federal excise tax law, the IRS assesses a 25% penalty on the difference between what a beneficiary should have withdrawn and what they actually took. If an heir was supposed to withdraw $15,000 in a given year and took nothing, the penalty would be $3,750 on that single year’s shortfall alone. Shortfalls can stack across multiple missed years, compounding the financial hit as each year’s required amount is tested separately.
There is a safety valve. The same statute allows the 25% rate to drop to 10% when the heir corrects the shortfall within a defined correction window. In practice, that means taking the missed distribution and filing the appropriate excise tax form before the IRS deadline for correction passes. Beneficiaries request the reduced rate on Form 5329, explaining the error and documenting that the missed amount has now been withdrawn. The IRS has historically been lenient when taxpayers act promptly, but the burden is on the heir to fix the mistake and ask for relief rather than waiting for the agency to flag the problem.
End of the informal grace period
During the early years after the SECURE Act changed the inherited IRA rules, the IRS repeatedly announced transition relief that waived penalties for beneficiaries who failed to take annual distributions while the agency worked through final regulations. That informal grace period is now over. With the effective date of the new rules set for 2025, heirs can no longer rely on temporary waivers or uncertainty around the 10-year rule as a shield against excise taxes.
The agency has used its main website at irs.gov to remind account owners aged 73 and older about their own required minimum distributions, but communication to heirs has been less direct. Many non-spouse beneficiaries only discover the annual requirement when a custodian updates its systems or when a tax preparer notices a missing withdrawal. By then, multiple years of shortfalls may have accumulated, raising the stakes for prompt correction.
Because the IRS regularly posts enforcement priorities and taxpayer alerts in its online newsroom updates, heirs should not assume that silence equals forgiveness. Custodians may send generic notices, but they are not responsible for paying the excise tax or filing Form 5329 on a beneficiary’s behalf. The responsibility to understand and follow the inherited IRA rules ultimately rests with the person who received the account.
What heirs should do before 2025
Non-spouse beneficiaries who inherited traditional IRAs or employer plan rollovers after 2019 should start with a clear timeline: confirm the original owner’s date of death and whether that person had already reached their own required beginning date for RMDs. That detail determines whether annual distributions apply in addition to the 10-year clean-out rule. Next, heirs should review prior years to see whether any withdrawals were taken and compare those amounts against what the life expectancy tables would have required.
If gaps emerge, beneficiaries can work with a tax professional to calculate the missed amounts and decide whether to correct past shortfalls before the 2025 rules bite harder. Even though the new regulations formally apply beginning in 2025, the excise tax statute itself has been in place, and the IRS can still impose penalties for earlier years if distributions were required but ignored. Acting now may limit the number of problem years and make a request for the reduced 10% rate more persuasive.
For heirs who have not yet taken any distributions, the priority is setting up a schedule that satisfies both the annual RMD and the 10-year deadline. That may mean front-loading withdrawals to avoid large taxable spikes late in the period or coordinating distributions with other income to manage marginal tax brackets. With the transition relief behind them, beneficiaries who inherited IRAs can no longer afford to treat the 10-year rule as a simple end-date; they must plan for a series of annual checkpoints, or risk paying a steep penalty on money they never actually received.
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