US FINANCE

USA Inherited IRA rules changed; don’t get mired in high taxes, penalties

US Street Talk News Desk February 18, 2026
4 min read
Inherited IRA rules - traditional IRA - US Street Talk
Inherited IRA rules - traditional IRA - US Street Talk

Washington DC, 19 February 2026: The amount inherited is welcome, but if it comes in the form of a retirement account (IRA), be careful. New rules for inherited IRAs (inherited individual retirement accounts) have come into effect in the US from 2025. This has put many heirs at risk of high taxes and penalties of up to 25%. These rules, which came under the 2019 SECURE Act, had a grace period from 2020 to 2024, but with the IRS issuing the final rules in July 2024, strict enforcement started from 2025.

After inheriting an IRA, it’s important to understand a lot of things. Most importantly, you may have to pay taxes sooner or later, said Mark Staber, chief tax information officer at Jackson Hewitt.

What is an IRA?

If you inherit someone’s traditional or Roth IRA after they pass away, it is called an ‘inherited IRA’. Heirs other than a spouse (like children, relatives, friends) cannot run the account as their own. Withdrawal rules apply, and careful planning is needed to avoid taxes and penalties.

Main change: 10-year rule

The 2019 SECURE Act removed the ‘stretch IRA’ (lifetime distribution) option. Now most non-spouse heirs (non-eligible designated beneficiaries) have to withdraw the entire IRA amount within 10 years after death – Roth IRAs are included too.

Who are the exceptions? (Eligible Designated Beneficiaries – EDBs)

  • Husband/Wife (surviving spouse)
  • Minor children (until reaching adulthood)
  • A disabled or long-term sick person
  • Heirs who are less than 10 years younger than the deceased

For these EDBs, an annual distribution option based on life expectancy is available.

From 2025, the annual RMD will be mandatory

If you have a traditional IRA:

  • If the deceased had started taking the RMD (Required Minimum Distribution) (RMD age – currently 73 years), the heirs will have to take an RMD every year starting from 2025. The 2025 RMD had to be taken by 31 December 2025.
  • If the deceased person hadn’t started the RMD, the heirs don’t need to take annual RMDs – they just have to withdraw everything within 10 years.

Roth IRAs don’t have RMDs, but you have to take out everything within 10 years.

How to avoid penalties?

If RMD is missed, a 25% penalty (excise tax) applies, meaning on the amount that should have been withdrawn. If corrected within two years, the penalty can be reduced to up to 10%.

Immediately remove the entire RMD.

  • Fill out Form 5329 (Additional Taxes on Qualified Plans) and file it with your 2025 federal tax return.
  • IRS has clarified that penalties were waived until 2020-2024, but from 2025 onwards ,there will be strict enforcement

How to avoid taxes? (Tax Implications)

Traditional IRA:
Any withdrawal (including RMD) is taxed as ordinary income. Taking out a big amount at once can push you into a higher tax bracket.

Roth IRA:
If the account is 5 years old, distributions are tax-free.

According to Vanguard’s advice, withdraw the amount equally over 10 years. This helps you benefit from a lower tax bracket and lets tax-deferred growth continue. Avoid taking out a big lump sum in the final year as it could increase taxes.

Tips (advice from Jonathan Fishburn of TIAA):

  • If your income fluctuates, save more in low-income years.
  • If a big bonus is coming, take less or no distribution that year.
  • Consider the impact of Medicare premiums, tax credits, and student loans.

Practical advice for heirs

  • Contact an IRA custodian (bank/fund house) immediately and open an ‘Inherited IRA’ account.
  • Check the death date and the RMD status of the deceased.
  • Talk to a tax advisor or financial planner – especially if you are in a high bracket
  • If RMD is wrong, fix it immediately.
  • If you have a Roth IRA, check the 5-year rule.

These rules apply to an IRA that died after 2020. Inheritances before 2019 follow different old rules.

Conclusion: Make the most of the inherited IRA, but don’t pay a 25% penalty or unnecessarily high taxes because you don’t know the rules. Plan now and check IRS Publication 590-B. For more information, visit irs.gov or contact a certified tax advisor.