Over the years, we’ve worked with many clients navigating the complexities of inheriting retirement accounts. A common — and confusing — scenario involves inheriting an IRA.

Amid the emotions that come with a loss, beneficiaries are often left to make important financial decisions under pressure. We’ve seen how unfamiliar rules, tax surprises, and tight deadlines can create unnecessary stress, and potentially lead to costly mistakes.

The good news? With information and guidance, you may be able to turn an inheritance into a meaningful part of your long-term financial strategy.

Common Mistakes to Avoid with an Inherited IRA

Inherited IRAs come with a unique set of rules, and in our experience, even financially savvy clients are often caught off guard. Here are some of the challenges we’ve helped clients avoid:

• Missing Required Deadlines
  One of the biggest issues is missing key withdrawal deadlines. The IRS doesn’t offer much leniency here — the penalty can be as high as 25% of what you were supposed to withdraw. This happens when beneficiaries assume they have time or don’t realize the clock has already started.
• Forgetting to Plan for Taxes
  In most cases, an inherited IRA is taxable, and distributions count as ordinary income. Without proper planning, withdrawals may push you into a higher tax bracket and leave you with an unexpected (and unwelcome) tax bill. Note: Inherited Roth IRAs are not taxable but have similar rules.
• Overlooking the SECURE Act Rules
  Since the SECURE Act went into effect, most non-spouse beneficiaries must make an annual minimum distribution and fully distribute the account within 10 years. If you’re in your peak earning years, this rule can have a major tax impact. We help clients time their distributions strategically and avoid tax surprises.
• Combining Funds with Your Own IRA
  Rolling the inherited IRA into your own retirement account is not allowed unless you’re the spouse of the decedent.

Tax Strategies to Make the Most of Your Inherited IRA

Handled with diligence and care, an inherited IRA can do more than provide financial support — it can become a key part of your long-term plan. Here are some ways that we advise clients through this process:

• Time Withdrawals to Manage Taxes
  Instead of taking large sums, consider spreading distributions over several years to manage your tax bracket. Or look to take larger sums when you have a low-income year. Your financial planner can model different withdrawal schedules, so you see how various options affect your taxes and long-term net benefit.
• Coordinate with Your Overall Financial Plan
  Your inherited IRA is now part of your larger financial picture. It’s important to consider how it integrates with your other assets, ensuring the investments support both your short-term needs and your long-term dreams. We’ve helped clients use inherited IRAs to pay off debt, fund college, or delay tapping their own retirement accounts.
• Invest with Purpose
  Just because it’s inherited doesn’t mean the account has to sit idle. You can still align inherited investments according to your goals, risk tolerance, and the required withdrawal schedule. One of the main issues we see is clients keeping the same exact investments as the deceased, who likely had very different needs and goals.
• One Rule Doesn’t Fit All
  Whether you’re a spouse, adult child, or another type of beneficiary, the rules for inherited IRAs vary—and so should your strategy. Working with a financial planner who understands these nuances can make the difference between a missed opportunity and a meaningful addition to your financial future.

Want more information? Consult the IRS guidelines for inherited IRAs.

Frequently Asked Questions About Inherited IRAs

Q: Do I have to pay taxes on an inherited IRA?
A: Most beneficiaries must pay income tax on distributions, depending on the type of IRA. Distributions from an inherited Roth IRA are not taxable.

Q: How does the 10-year rule for inherited IRAs work?
A: Under the SECURE Act, many beneficiaries must withdraw the full balance of the inherited IRA within 10 years, sometimes with required annual distributions. There are exceptions for eligible designated beneficiaries, such as surviving spouses, individuals with disabilities, and beneficiaries who are less than 10 years younger than the IRA owner.

Q: Can I roll over an inherited IRA into my own IRA?
A: Only spouse beneficiaries can do this. Others must open an inherited IRA.

Q: What happens if I miss a required minimum distribution (RMD) from an inherited IRA?
A: You could face a penalty of up to 25% of the amount you should have withdrawn. In some cases, the IRS may reduce the penalty if you correct the error promptly.

Q: Can I continue contributing to an inherited IRA?
A: No. You cannot make contributions to an inherited IRA—even if you’re still working or under age 70½.

Q: What are my options as a spouse beneficiary of an inherited IRA?
A: Spouses have more flexibility. They can:
– Treat it as their own IRA (combine it with an existing IRA)
– Open an inherited IRA — often better if you’re under age 59½ and may need access to the funds. This avoids the 10% early withdrawal penalty that typically applies to your own IRA.

Next Steps

If you’ve recently inherited an IRA — or expect to in the future — consider creating a plan that supports your short and long-term financial goals. A financial planner who understands the rules, the risks, and the opportunities can help you turn an inheritance into an impactful and strategic part of your financial future.