Inherited IRA Rules Changed in 2025: What American Expats Need to Know Before Year-End
If you’re an American living abroad who inherited an IRA from a parent or other family member, a significant rule change took effect in 2025 that could cost you thousands in penalties. After years of leniency from the IRS, the agency is now enforcing penalties of up to 25% for missed required minimum distributions (RMDs) from inherited IRAs.
According to a December 2024 report from Cerulli Associates, more than $84 trillion is expected to pass to heirs through 2045, making inherited IRAs a critical issue for thousands of expats. The new 2025 rules mean you need to take action now to protect your inheritance and avoid penalties while managing the unique challenges of living abroad.
What is an RMD and Why Does It Matter?
A Required Minimum Distribution (RMD) is the minimum amount you must withdraw from certain retirement accounts each year once you reach a specific age or inherit an account. Think of it as the IRS saying, “We’ve let this money grow tax-deferred long enough. Now it’s time to withdraw it and pay taxes.”
For your own retirement accounts, RMDs typically start at age 73. But when you inherit an IRA, different rules apply. The IRS wants to ensure inherited retirement money doesn’t stay tax-sheltered indefinitely, which is why it now requires annual withdrawals during the 10-year period.
The amount you must withdraw is calculated based on the account balance and IRS life expectancy tables. Your IRA custodian will typically calculate this for you, but you’re responsible for taking the withdrawal. Miss it, and you face that 25% penalty on the amount you should have taken out.
For expats, RMDs create an extra layer of planning because these withdrawals count as taxable income in the US and potentially in your country of residence. The key is knowing when RMDs apply to your inherited IRA and planning accordingly.
What Changed for My Inherited IRA in 2025?
Starting in 2025, the IRS began enforcing penalties on beneficiaries who fail to take annual RMDs from inherited IRAs. This marks a significant shift, following the waiver of penalties from 2021 through 2024.
The rule applies if you inherited an IRA from someone who died in 2020 or later, and the original owner had already reached their RMD age (currently 73) before passing away. If you’re an adult child who inherited an IRA from a parent who was taking RMDs, this rule likely applies to you.
The 10-Year Rule: Since 2020, most non-spouse beneficiaries of inherited IRAs are required to distribute the funds within 10 years of the original owner’s death. This replaced the old “stretch IRA” rules that allowed lifetime distributions.
Annual RMDs Required: The IRS confirmed in July 2024 that if the original IRA owner had reached RMD age before death, beneficiaries must take annual RMDs during those 10 years. You cannot wait until year 10 to withdraw everything.
Penalties Now Enforced: Missing an RMD triggers a 25% penalty on the amount you should have withdrawn. This can be reduced to 10% if you correct the mistake within two years by filing Form 5329 with a reasonable explanation.
Why Does Living Abroad Make This More Complicated?
Living abroad adds complexity to managing inherited IRAs that Americans in the US don’t face:
Currency Exchange: RMD withdrawals in USD must be converted to your local currency. Exchange rate fluctuations can significantly impact what you receive. Consider timing withdrawals during favorable rates, though you must still meet the December 31 deadline.
Time Zone Challenges: The December 31 deadline doesn’t adjust for international time zones. If you’re in Asia or Australia, what’s still December 31 in New York might be January 1 where you live. Complete RMDs by mid-December to avoid complications.
US Bank Account Access: Many US financial institutions have become reluctant to serve expats, potentially freezing accounts or forcing closures. Verify that your IRA custodian will continue to serve you abroad. Consider transferring to expat-friendly custodians, such as Fidelity, Vanguard, or Schwab, if needed.
Foreign Tax Considerations: RMD withdrawals are taxed as ordinary income in the US, but your country of residence may also tax this income. You may use the Foreign Tax Credit to offset US taxes with foreign taxes paid on the same income, requiring careful coordination between your US and foreign tax returns.
FBAR Reporting: While US-based IRAs aren’t foreign accounts for FBAR purposes, any foreign accounts where you deposit your RMD withdrawals must be reported if combined foreign account values exceed $10,000.
Do I Have to Take RMDs from My Inherited IRA?
You must take annual RMDs if:
- You inherited an IRA from someone who died in 2020 or later
- You’re a non-spouse beneficiary (adult child, sibling, etc.)
- The original owner had reached the age of 73 before death
- You’re not a minor child, disabled, chronically ill, or within 10 years of the deceased’s age
You don’t need annual RMDs if:
- The original owner died before reaching RMD age (though you still must empty the account within 10 years)
- You’re the surviving spouse (different rules apply)
How Do I Calculate My RMD?
Your IRA custodian should calculate your RMD, but verify it’s correct. The RMD is calculated by dividing the prior year’s December 31 account balance by a life expectancy factor from IRS Publication 590-B.
Don’t assume your custodian will automatically remind you. As an expat, mail notifications may not reach you, and electronic alerts might go to spam. Take ownership of tracking your RMD requirements.
What’s My Strategy for the 10-Year Window?
Even with required annual RMDs, you have flexibility in how you manage withdrawals beyond the minimum:
- Tax Bracket Management: If you’re in a low-income year due to the Foreign Earned Income Exclusion, consider taking more than the minimum RMD to spread out the tax burden and prevent a massive taxable distribution in year 10.
- Front-Loading Withdrawals: Taking larger distributions in early years when income is lower or exchange rates are favorable leaves less to withdraw later and reduces the risk of higher tax brackets.
- Coordinating with Retirement: If you’re approaching retirement abroad, coordinate inherited IRA withdrawals with your personal retirement planning. Taking larger distributions while working might be smarter than waiting until you have other retirement income.
What If I Already Missed an RMD?
The IRS waived penalties for 2021-2024 due to widespread confusion. However, if you missed your 2025 RMD:
- Take the missed distribution immediately
- Calculate the shortfall if you took some but not enough
- File Form 5329 with your tax return explaining reasonable cause
- Provide a thorough explanation (being abroad, not knowing about the rule change, custodian miscommunication, etc.)
The IRS has shown willingness to waive penalties for inherited IRA beneficiaries who demonstrate reasonable cause and take corrective action.
How Can I Work with US Custodians from Abroad?
- Maintain a US Address: Many expats use a family member’s address or mail forwarding service as their US address with financial institutions.
- Update Contact Information: Ensure your email and phone are current. Request electronic communications rather than mail.
- Verify International Transfer Capabilities: Confirm your custodian can wire funds internationally or that you have a US bank account for receiving transfers.
- Test Early: Don’t wait until December for your first RMD. Process a withdrawal early in the year to identify and resolve any access, transfer, or documentation issues.
How Can Greenback Help Me?
Managing an inherited IRA from abroad involves complex interactions between US tax law, foreign tax rules, and international money movement.
Our CPAs and Enrolled Agents have extensive experience calculating inherited IRA RMDs for expats, coordinating US and foreign tax obligations on distributions, and planning multi-year strategies to minimize taxes. Many of our tax professionals are expats themselves living in 14 time zones, so they know firsthand the challenges of managing US financial accounts from abroad.
What Should I Do Before Year-End?
If you’ve inherited an IRA and live abroad:
- Determine if annual RMDs apply based on when the original owner died
- Contact your IRA custodian to verify your RMD amount for 2025
- Process your withdrawal by mid-December for time zone differences
- Plan for currency conversion to your foreign bank account
- Consider taking more than the minimum to spread out the tax impact
- Review your FBAR requirements if withdrawals affect foreign account balances
Your Next Steps
The 2025 inherited IRA rule changes represent a significant shift from the IRS’s previous approach. For Americans living abroad, these changes create additional complexity in managing US financial accounts internationally.
The 25% penalty for missed RMDs is substantial, but the good news is that with proper planning, you can stay compliant and protect your inheritance. Whether you inherited an IRA recently or several years ago, now is the time to get your distribution strategy in order.
You don’t have to figure this out alone. Taking action now protects your inheritance and gives you peace of mind that your US tax obligations are handled correctly. The key is knowing your requirements, meeting your deadlines, and working with professionals who are experts in expat tax situations.
Ready to ensure your inherited IRA is handled correctly? Click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions. Our expat tax experts will review your situation, calculate your RMD requirements, and develop a tax-efficient distribution strategy that works with your life abroad.
Don’t let the 2025 inherited IRA rules cost you thousands in penalties
This article provides general information and is not tax advice. Inherited IRA rules vary based on individual circumstances. Consult a qualified expat tax professional to review your specific situation.
