Inheriting my mom's IRA: How to cover $10K in 2025 RMDs without cash?

Experiencing the loss of a loved one is always difficult, and the added complexity of managing inherited retirement accounts can make things even harder. However, having a clear understanding of your options can help you avoid a significant tax burden, especially when inheriting a large sum of money.

Consider the case of Becka, a hypothetical married mother of three, who has inherited her mother's Individual Retirement Account (IRA). In 2025, she is required to withdraw a minimum of $10,000 (RMD) from the account, but theres no cash available. The IRA consists of a mix of stocks, bonds, and mutual funds, making liquidation a bit more complicated.

Inherited IRAs are subject to complex rules, so its advisable for Becka to seek guidance from a financial advisor or tax professional before taking any action.

New Rules for Inherited IRAs

The SECURE Act 1.0 and 2.0 introduced new rules for IRA distributions, particularly for accounts inherited from individuals who passed away in 2020 or later. Among the key changes, the "stretch" IRA option for non-spouse beneficiaries has been eliminated. Now, individuals inheriting an IRA from a parent or other non-spouse must deplete the account within 10 years after the year of the original account holders death.

If Beckas mother passed away in 2022, Becka would need to begin withdrawing from the IRA in 2023, and the account must be emptied by December 31, 2032. The required minimum distributions will depend on several factors, including the account balance at the end of the prior year and whether the original account holder had already begun taking RMDs.

If Beckas mother had been taking RMDs before her death, Becka, as a non-spouse beneficiary, would also need to continue these withdrawals annually. Missing an RMD could result in a 25% excise tax on the missed amount, in addition to regular income taxes. Additionally, if any funds remain after the 10-year period, they will be subject to a 50% penalty.

Options for Non-Spouse Beneficiaries

Beneficiaries who are not spouses, like Becka, have specific options. They cannot roll the inherited assets into their own IRA. Instead, they can set up an "inherited IRA," sometimes called a "beneficiary IRA." This applies whether the inherited IRA is a traditional or Roth IRA. While Roth IRAs also follow the 10-year rule, their distributions are tax-free as long as the account has been open for at least five years.

Non-spouse beneficiaries cannot contribute new funds to an inherited IRA, but the funds continue to grow tax-deferred. Becka also has the option to take a lump-sum distribution, although this would be taxed as regular income, potentially pushing her into a higher tax bracket. Spreading the distributions over the 10-year period can help mitigate this tax impact, but consulting with a tax professional can help tailor the best strategy.

Managing the IRA's Assets

The assets within an inherited IRA are taxable when distributed. Becka will need to liquidate some of the assets in the account to meet the $10,000 RMD requirement. If the IRA provider allows, she may be able to take in-kind distributions. This means transferring the actual securities (stocks, bonds, mutual funds, ETFs) out of the IRA rather than cashing them out. This could be beneficial if the assets are performing well or if the IRA has illiquid investments such as real estate.

Alternatively, Becka could sell some of the assets to fulfill the RMD and reinvest the proceeds in other assets that align with her risk tolerance. Another approach would be to sell underperforming assets or cash out assets that are doing well in a strong market, potentially rebalancing her holdings to suit her future distribution needs.

Because the rules around inherited IRAs can be complicated, it is highly recommended to consult IRS Publication 590-B for more details or speak with a tax advisor who can provide personalized advice and help develop an optimal tax strategy for withdrawals.

Sources:

• I inherited my mom’s IRA and must take $10K in 2025 RMDs, but there’s no cash. What should I liquidate?

Author: Logan Reeves
Logan Reeves is a sports analyst and journalist. He writes match reviews, conducts athlete interviews, and produces data-driven predictions.