The IRS has released final guidelines for inherited IRAs, but many individuals are still not taking full advantage of tax benefits, according to a financial expert.

• Non-spouse beneficiaries have 10 years to deplete inherited retirement accounts and must take yearly required minimum distributions (RMDs), as confirmed by the IRS last week.
• If the original account owner of an inherited account started RMDs before 2020, the rule applies to that account.
• You could save on taxes by taking larger withdrawals earlier, depending on your circumstances.

Experts advise heirs to be cautious when taking minimum required withdrawals from inherited individual retirement accounts and other plans, as they may owe more taxes in the future.

The agency has confirmed that non-spouse beneficiaries have 10 years after the original owner's death to deplete inherited retirement accounts. These heirs must also take yearly required minimum distributions (RMDs), which had been a source of uncertainty among tax professionals for some time.

Under the Secure Act of 2019, heirs can no longer "stretch" retirement account withdrawals over their lifetime, which increases yearly taxes. The shorter 10-year withdrawal window can result in bigger tax bills, particularly for high-income heirs.

Ed Slott, an IRA expert and certified public accountant, advised that heirs are "missing the boat" because they should consider withdrawing more from inherited accounts now while tax rates are lower.

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Pre-tax inherited account withdrawals incur regular income taxes.

After 2025, individual tax provisions, including lower federal income tax brackets, will expire unless Congress acts, resulting in rates being reverted to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

"Each year you miss using [the lower brackets] is a lost chance," Slott stated.

Before deciding to take faster retirement account distributions, it is important to consider both current-year tax consequences and future tax projections, as the certainty of higher taxes after 2025 and other factors may impact the decision.

Which heirs must start yearly RMDs in 2025

In 2025, certain heirs will need to start taking yearly RMDs from inherited accounts, as per finalized IRS rules, advised Edward Jastrem, a certified financial planner and chief planning officer at Heritage Financial Services in Westwood, Massachusetts.

He advised against panicking, but emphasized the importance of understanding the current situation, particularly the calculation for your upcoming RMD, which custodians may not provide.

The new IRS guidelines apply to heirs who are not a spouse, minor child, disabled, chronically ill, or certain trusts. The yearly withdrawal rule only applies if the original account owner had reached their RMD age before death.

If you fail to withdraw the required minimum distribution (RMD) annually or take less than the required amount, you will face a 25% penalty on the amount you should have withdrawn. However, if the RMD is corrected within two years, the penalty can be reduced to 10%, according to the IRS.