Big changes are coming to Individual Retirement Accounts (IRAs) in 2025, and if you’re not paying attention, you could face hefty penalties. Thanks to updates from the SECURE 2.0 Act, the IRS is tightening the rules on Required Minimum Distributions (RMDs), inherited IRAs, Roth conversions, and small business retirement plans.
So, who’s at risk? Let’s break it down.
Table of Contents
Inherited IRAs
If you inherited an IRA after 2019, the 10-year rule means you must fully withdraw the funds within a decade. But now, there’s an added twist:
- If the original account holder was already taking RMDs, beneficiaries must continue those annual withdrawals before emptying the account by year 10.
- Missing an RMD triggers a 25% penalty on the amount you should have taken.
- Certain heirs, like spouses, minors, and disabled individuals, may get exceptions, but siblings and non-family members are on the hook.
RMD Changes
The Required Minimum Distribution (RMD) age is shifting again:
- Born between 1951-1959? Your RMDs start at age 73.
- Born 1960 or later? Your RMDs kick in at age 75.
If you’re required to take an RMD in 2025 and miss it, expect that 25% penalty. Late filers get a slight break if they correct the mistake quickly—the penalty drops to 10% if fixed in time.
Roth IRA Conversions
Roth IRAs have no RMDs, making them attractive for high-income earners looking to convert traditional IRA funds before 2026’s expected tax hikes. But there’s a catch:
- Withdraw funds too early (before five years) and you could face a 10% penalty, plus taxes.
- Reporting mistakes can trigger additional IRS scrutiny, especially as audits on Roth conversions increase.
Small Business IRA Limits
Small business owners with SEP IRAs or SIMPLE IRAs must watch out for new 2025 contribution limits. Overfunding your account could result in a 6% penalty on excess contributions.
- Payroll deductions must stay within IRS limits to avoid fines.
- Business owners should double-check their funding plans to stay compliant.
Stay Ahead
With these rule changes, the IRS is cracking down harder than ever. Whether you’re inheriting an IRA, approaching retirement, considering a Roth conversion, or running a small business, missing a key deadline or contribution limit could cost you.
Stay sharp, follow the updated rules, and avoid the IRS penalties that could take a bite out of your retirement savings.
FAQs
What is the 10-year rule for inherited IRAs?
Beneficiaries must fully withdraw inherited IRA funds within 10 years.
What happens if I miss an RMD in 2025?
You face a 25% penalty on the amount you should have withdrawn.
When do RMDs start under the new rules?
Age 73 for those born 1951-1959, age 75 for those born 1960 or later.
What is the Roth IRA five-year rule?
Funds withdrawn before five years may be subject to a 10% penalty.
Can small business owners be penalized for IRA overfunding?
Yes, overfunding SEP or SIMPLE IRAs can trigger a 6% penalty.
