IRS Penalties: The IRS is rolling out significant updates to Individual Retirement Account (IRA) rules in 2025 under the SECURE 2.0 Act. These changes tighten deadlines and adjust distribution requirements—meaning that if you’re not careful, an IRS penalty could be on your doorstep. Let’s break down the key groups affected and how to avoid costly mistakes.
Inherited IRA Beneficiaries
Inherited IRAs are seeing some of the biggest changes:
- 10-Year Rule Lock-In: Beneficiaries who inherited IRAs after 2019 must withdraw the entire account balance within 10 years.
- Required Minimum Distributions (RMDs): If the original owner was already taking RMDs, beneficiaries must continue to withdraw annually and fully deplete the account by the end of the 10-year period.
- Penalty for Missed RMDs: Failing to take the full required distribution on time can lead to a 25% penalty on the amount not withdrawn.
Note: Exceptions may apply for certain beneficiaries such as widows, disabled heirs, or those under 21, but siblings or non-related inheritors must strictly adhere to these rules.
Retirees and the New RMD Age
For retirees, the changes affect when and how you must start your RMDs:
- New RMD Start Age: The SECURE 2.0 Act now mandates that individuals begin taking RMDs at age 73 (for those born between 1951 and 1959) and age 75 for those born after 1960.
- Consequences of Delayed Withdrawals: Missing your RMD deadline—for example, failing to withdraw by April 1 for those turning 73 this year—can result in the same steep 25% penalty on the amount that should have been withdrawn.
Roth Conversion Considerations
Roth IRAs are not entirely exempt:
- Roth Conversion Risks: Although Roth IRAs do not require RMDs during the account owner’s lifetime, individuals converting to Roth IRAs must be wary of the five-year holding period.
- Penalty for Early Withdrawals: Mismanaging this rule or improperly reporting can trigger a 10% penalty on early withdrawals, along with accrued interest.
SEP and SIMPLE IRA Updates
Small business owners need to take note:
- Contribution Caps: New contribution limits mean that overfunding your SEP or SIMPLE IRA could lead to a 6% penalty on the excess amount.
- Regular Checks Recommended: Monitoring payroll and contribution limits is crucial to avoid any inadvertent overfunding penalties.
Read Also:
April 2025 Social Security Payments: What Retirees Need to Know
FAQs
Q1: Who is most at risk for penalties due to the new IRA rules?
A1: Inherited IRA beneficiaries, retirees missing their new RMD deadlines, and individuals mishandling Roth conversions or overfunding SEP/SIMPLE IRAs are most at risk.
Q2: What is the penalty for missing an RMD?
A2: Missing an RMD can incur a penalty of 25% on the amount that should have been withdrawn.
Q3: Are there any exceptions to these rules for inherited IRAs?
A3: Yes, exceptions may apply for certain beneficiaries, such as widows, disabled individuals, or those under 21 years of age, though most other beneficiaries must follow the new guidelines strictly.
Q4: How can I avoid these penalties?
A4: Stay informed of the new deadlines, closely monitor your distribution requirements, and consult with a tax professional to ensure compliance with the updated rules.
As a finance news writer at sirfal.com, I specialize in breaking down complex economic trends, market updates, and investment strategies into clear, actionable insights. My mission is to empower readers with the knowledge needed to make informed financial decisions. Thank you for engaging with my articles; I hope they add value to your financial journey.