How a Financial Advisor Can Help You Avoid Common Inherited IRA Mistakes

Inheriting an IRA can be both a financial opportunity and a complex responsibility. While it may seem straightforward at first, the rules around inherited IRAs are often misunderstood, and even small mistakes can lead to unexpected taxes or penalties. 

A financial advisor can help you understand your options, avoid costly missteps, and create a strategy that preserves as much of your inherited wealth as possible. 

In this blog, we’ll break down the most common inherited IRA mistakes and how working with a professional can help you navigate each one with confidence.

 Avoid Common Inherited IRA Mistakes with a Financial Advisor

Navigating complex IRS rules, understanding deadlines, and figuring out tax obligations can quickly become stressful, and mistakes can be costly, potentially reducing the legacy a loved one intended to leave behind. 

A skilled financial advisor can guide you through these decisions with clarity and confidence, helping you protect your inheritance, minimize taxes, and make choices that honor the financial legacy entrusted to you.

Here’s how a wealth advisor can help you avoid some common mistakes when it comes to inheriting an IRA: 

1. Knowledge of IRS Rules

IRS rules for inherited IRAs can be confusing, with deadlines, age requirements, and tax treatments that differ depending on the type of beneficiary. Even a small misstep can result in costly penalties, diminishing the inheritance your loved one intended to pass on. 

Most non-spouse beneficiaries,  such as adult children, are subject to the 10-year distribution rule, and as of this year, many will also face a new required minimum distribution (RMD) obligation if the original IRA owner had reached RMD age before their death. Missing these withdrawals could trigger a steep 25% IRS penalty, though acting quickly may reduce it to 10% or, in some cases, lead the IRS to waive it entirely.

A knowledgeable financial advisor can guide you through the process, ensuring your inherited IRA is managed correctly, stays fully compliant with IRS regulations, and helps you preserve the maximum value of your legacy.

2. Knowledge of Tax Regulations

Another common pitfall for heirs is underestimating the tax impact of an inherited IRA. Withdrawals from a pretax IRA are generally taxed as ordinary income, and failing to plan for those taxes over the 10-year distribution period can lead to an unexpectedly large tax bill in the final year. Some beneficiaries try to minimize early withdrawals and take a lump sum at the end, but this approach can trigger significant taxes in that final year. 

A financial advisor can help by running multi-year tax projections, evaluating your income patterns, and recommending a withdrawal strategy that spreads distributions in a way that minimizes taxes. For instance, it may make sense to accelerate withdrawals during years when your other income is lower, helping you preserve more of the inheritance.

3. Knowledge of How to Adjust Your Investment Strategy

A third common mistake is leaving inherited IRA investments unchanged. Many heirs simply keep the assets as they were, but your inherited IRA should reflect your own risk tolerance, financial goals, and timeline. Since it’s now your money, it’s important to align the investments with your needs while also considering tax implications, annual RMD requirements, and income needs. For example, holding long-term certificates of deposit or other illiquid investments that mature after your RMD window can create challenges or additional costs when it’s time to take distributions. 

Working with a financial advisor can help you create an investment strategy that balances growth, liquidity, and tax efficiency, ensuring your inherited IRA supports both your short- and long-term financial objectives.

 Avoid Common Inherited IRA Mistakes with JTM

With careful planning and guidance, you can protect your legacy and make the most of the assets entrusted to you. Avoiding common mistakes, from tax missteps to investment mismatches, requires both knowledge and strategy. A financial advisor can help you navigate these complexities, create a withdrawal plan tailored to your needs, and provide peace of mind that your inheritance is being managed wisely. 

If you’ve recently inherited an IRA or want to ensure your future inheritance is handled efficiently, contact JTM Williams Capital Management today to speak with a trusted advisor who can guide you every step of the way.