Advisors Warn of Costly Mistakes with Inherited IRAs Amid Growing Wealth Transfers

Financial advisors are urging beneficiaries to exercise caution when managing inherited individual retirement accounts (IRAs), as complex IRS rules and looming deadlines could lead to steep penalties and unexpected taxes. Non-spouse heirs, such as adult children, face new distribution requirements beginning in 2025, and experts warn that missteps could significantly reduce inherited wealth during the ongoing “great wealth transfer,” projected to see over $100 trillion pass between generations by 2048, according to Cerulli Associates.

Under rules introduced in 2020, many inherited IRAs must be fully depleted within 10 years of the original owner’s death. For non-spouse beneficiaries whose benefactor had reached the required minimum distribution (RMD) age before passing, annual RMDs will be mandatory starting in 2025. Failure to meet these withdrawals could trigger a 25% IRS penalty, though the fine can drop to 10% if corrected within two years and reported properly.

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“The [inherited IRA] rules can get complex fast, and it’s critical to know your options,” said Brett Koeppel, certified financial planner and founder of Eudaimonia Wealth in Buffalo, New York.

Advisors also caution that beneficiaries of pretax IRAs could face “significant taxes” if they delay withdrawals. “Some heirs aim to take only their RMD for the first nine years and a lump sum in year 10,” noted John Nowak, CFP and founder of Alo Financial Planning in Illinois. “But this could mean significant taxes in that final year of distribution.” Experts recommend running multi-year tax projections to optimize withdrawals and minimize liabilities.