5 Costly Inherited IRA Mistakes That Drain Your Account

The SECURE Act ended the "stretch IRA" starting January 1, 2020, replacing it with a 10-year deadline for most heirs to empty inherited IRAs. This creates five common costly mistakes.

**Ignoring annual requirements.** If the original IRA owner died on or after their required beginning date for required minimum distributions (RMDs), heirs must take annual withdrawals. The IRS penalty for missing an RMD is 25% of the shortfall, or 10% if corrected in time. Ask your custodian in year one whether the original owner had started RMDs and get your annual requirement in writing.

**Waiting to withdraw because you don't need the money.** Taking a $500,000 inheritance all in year 10 at a 7% annual return creates roughly $984,000 in account value. Withdrawing it all while earning $200,000 annually would trigger about $322,000 in federal income tax, an average rate of roughly 33%. Taking about $71,000 per year over 10 years keeps withdrawals in the 24% bracket for an average federal rate of about 23%. Reinvest the withdrawals in a taxable account rather than postponing them.

**Assuming equal yearly withdrawals are best.** Your income will change over the decade. If you plan to retire mid-window, take only required amounts during high-income years and larger withdrawals after retirement. Build a year-by-year income projection and aim the largest withdrawals at your lowest-income years.

**Converting all of your IRA to a Roth without comparing tax rates.** A Roth conversion is taxable income now. If your current tax rate is lower than your children's expected rate, converting makes sense. If your rate is much higher and your kids expect modest incomes, leaving traditional IRA dollars may be smarter. A nonspouse heir cannot convert an inherited traditional IRA to a Roth after the original owner dies.

**Missing the benefits of an inherited Roth.** Heirs under the 10-year rule must empty an inherited Roth by the deadline, but they owe no annual RMDs regardless of the owner's age at death. Qualified withdrawals are tax-free. If the original owner opened their first Roth less than five tax years before a withdrawal, earnings may be taxable. If you inherit a Roth and don't need the money, let it grow and withdraw near the deadline.