Inherited an IRA? Avoid 3 Costly Mistakes That Can Erode Your Windfall

Inheriting an individual retirement account can be a significant financial event — and a tax trap if handled incorrectly. Financial advisors warn that three recurring missteps often cost beneficiaries far more than they expect: cashing out too quickly, misunderstanding distribution rules, and ignoring beneficiary designations or trust language.

First, an immediate lump-sum withdrawal may feel like the simplest choice, but it can push you into a much higher tax bracket. Traditional IRA distributions are taxed as ordinary income. For non-spouse beneficiaries, cashing out instead of using available distribution options can trigger a large, avoidable tax bill in the year of inheritance.

Second, the post-SECURE Act landscape changed how inherited IRAs are handled. Many non-spouse beneficiaries are subject to the 10-year rule: the account must be fully distributed within ten years of the original owner’s death. Misinterpreting required minimum distribution (RMD) timing or missing deadlines can create penalties and unexpected tax consequences. Spouses have more flexibility — including rolling the account into their own IRA — but even they should evaluate the tax impact before making a move.

Third, beneficiary designations and trust provisions matter. If beneficiaries are not correctly named or accounts are commingled with estate assets, the intended inheritance path can be disrupted. Trusts named as beneficiaries introduce their own distribution rules and tax implications; trustees and beneficiaries should review trust language with an estate attorney.

Practical steps: confirm the account type (traditional vs. Roth), verify beneficiary designations, and determine which distribution rules apply. Consider spreading withdrawals strategically across years to manage tax brackets, or evaluate a Roth conversion only after consulting a tax professional. Keep thorough records of the decedent’s paperwork and the account custodian’s requirements, and consult a certified financial planner or estate attorney before making irreversible moves.

While inheriting an IRA offers financial opportunity, it also requires careful planning. A deliberate approach that aligns tax strategy, timing and legal documentation can preserve far more of the inheritance for its intended purpose.