Inheriting an Individual Retirement Account (IRA) can be both a blessing and a curse, as it comes with complex tax rules and potential pitfalls for the heirs who inherit these accounts. The average IRA balance during the fourth quarter of 2024 was $127,534, up 38% from 2014, according to Fidelity’s analysis of 16.8 million IRA accounts as of December 31st. However, some inherited IRAs are significantly larger and can lead to costly mistakes if not managed properly.
One such mistake is the misunderstanding or misapplication of the “stretch IRA” rule before the Secure Act of 2019. Prior to this act, heirs could empty their inherited IRAs over time to reduce yearly taxes. However, since 2020, certain beneficiaries must follow the “10-year rule,” which requires that all funds in an inherited IRA be depleted by the tenth year after the original account owner’s death. This applies to non-spouse heirs who are not minors, disabled, chronically ill or fall under specific trust categories.
Another common mistake is waiting until the 10th year to withdraw most of the balance from a pre-tax inherited IRA. Certified financial planner Trevor Ausen warns that this can lead to a “ticking tax bomb,” as it may push heirs into higher tax brackets due to the additional income in a single year. Similarly, some heirs cash out their inherited IRAs soon after receiving them, which could result in significant penalties and taxes if not handled correctly.
To avoid these mistakes, experts recommend seeking professional financial advice from an IRA expert or certified financial planner who can guide you through the complexities of managing your inherited IRA. Understanding the tax rules associated with inherited IRAs is crucial to ensure that heirs maximize their potential windfall without incurring costly penalties and taxes.
[Original Article](https://www.nbcnews.com/news/us-news/inherited-ira-mistakes-to-avoid-rcna198736) #these #inherited [Visit GhostAI](https://ghostai.pro/)
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