Australians with American family ties or dual citizenship are increasingly encountering U.S. Individual Retirement Accounts (IRAs) as part of their inheritance planning. An inherited IRA is a powerful—but complex—financial tool, especially after sweeping U.S. legislative changes in recent years. If you’re an Australian inheriting or managing a U.S. IRA in 2025, understanding the new rules, tax implications, and cross-border issues is essential for making informed choices.
What Is an Inherited IRA and Why Does It Matter in 2025?
An inherited IRA is a retirement account that you receive after the original owner—often a parent or spouse—passes away. In the U.S., these accounts are subject to strict distribution rules, particularly after the SECURE Act and its subsequent updates. For Australians, the stakes are higher: the tax treatment is different, and errors can lead to double taxation or costly penalties.
- SECURE Act 2.0 (2025 Update): The 2025 enhancements to the SECURE Act clarified mandatory distribution timelines and added flexibility for certain eligible designated beneficiaries (EDBs), such as minor children and the disabled.
- 10-Year Rule: Most non-spouse beneficiaries must now empty the inherited IRA within 10 years of the original owner’s death. For Australians, this means careful annual planning to avoid large, lump-sum tax bills.
- U.S.-Australia Tax Treaty: The treaty provides some relief but navigating the interaction between U.S. estate taxes and Australian income taxes is nuanced.
Tax Implications: Avoiding Double Taxation Traps
One of the biggest pitfalls for Australians inheriting a U.S. IRA is taxation. Here’s how the landscape looks in 2025:
- U.S. Tax Withholding: The IRS may require withholding on distributions to non-resident aliens. However, with the correct W-8BEN form and the U.S.-Australia treaty, you can often reduce or eliminate this.
- Australian Taxation: The ATO generally treats IRA distributions as assessable foreign income. Unlike U.S. superannuation, there are no tax-free lump sum exemptions—so each distribution may increase your Australian tax bill.
- Tax Credits and Offsets: Australians can claim a foreign income tax offset for any U.S. tax paid, but careful record-keeping is essential to avoid paying more than required.
Example: If you receive a $50,000 distribution from an inherited IRA in 2025, the U.S. might withhold 15%, but you’ll still need to declare the entire amount in your Australian tax return. Your actual out-of-pocket tax depends on your marginal rate and the offset you can claim.
Strategic Moves for Australian Beneficiaries
With the 10-year rule now firmly in place, Australians inheriting IRAs need to be proactive:
- Plan Distributions: Rather than withdrawing the full amount in one year (which could bump you into a higher tax bracket), consider spreading distributions over the full 10-year window.
- Monitor Exchange Rates: Timing withdrawals when the AUD is strong against the USD can boost your effective inheritance.
- Seek Specialist Advice: Cross-border taxation is intricate. Look for financial planners or accountants with experience in both Australian and U.S. tax law.
- Watch for Estate Tax: For large IRAs, the U.S. estate tax exemption is $13.6 million in 2025. Australians inheriting from wealthy relatives should be aware of potential estate tax filings.
Some Australians are now using trusts or local superannuation strategies to complement their U.S. IRA inheritance, ensuring smoother wealth transfer to the next generation.
Real-World Scenario: Navigating an Inherited IRA in 2025
Consider Emma, a Sydney-based professional who inherited a $400,000 IRA from her late mother in California. Under the new 10-year rule, Emma must withdraw the entire balance by 2035. If she takes $40,000 per year, she’ll pay U.S. withholding tax (likely 15%) and declare the full amount in her Australian return. With careful planning, Emma can claim offsets and spread her tax burden, maximising her inheritance and minimising stress.
Key Takeaways for Australians
- Inherited IRAs are governed by strict U.S. rules, especially after 2025’s SECURE Act updates.
- Distributions are taxable in Australia, with potential for U.S. withholding unless treaty benefits are claimed.
- Spreading withdrawals and seeking cross-border financial advice can help protect your legacy.
