If you recently inherited an IRA or 401(k), the most important thing to know is that most non-spouse beneficiaries must withdraw the entire account within 10 years, and the choices you make in the first weeks can affect how much of the money you actually keep. The inherited IRA rules changed significantly in recent years, and the old advice about stretching withdrawals over your lifetime no longer applies to most people.
What is the 10-year rule?
For most adult children and other non-spouse beneficiaries, the account must be emptied by the end of the tenth year after the original owner’s death. Depending on when the original owner passed away and whether they had already started required withdrawals, you may also need to take withdrawals along the way rather than waiting until year ten. The rules have shifted more than once, so it is worth confirming your specific timeline rather than relying on something you read a few years ago.
Do spouses have different options?
Yes, and they are usually better ones. A surviving spouse can often treat the inherited account as their own, which may allow withdrawals to be spread over their lifetime. Certain other beneficiaries, such as those with a disability or chronic illness, may also qualify for more flexible treatment. If you think you might fall into one of these categories, it is worth confirming before making any withdrawals.
Why does the timing of withdrawals matter?
Because most withdrawals from a traditional IRA count as taxable income to you. Emptying the account in a single year could push you into a higher tax bracket, while spreading withdrawals across the 10 years often produces a smaller total tax bill. The best schedule depends on your income, your plans, and the size of the account, which is why a little planning up front can be worth a great deal.
What mistakes should you avoid?
A few come up again and again: Cashing out immediately without understanding the tax hit. Retitling the account incorrectly, since an inherited IRA must be moved in a specific way to preserve its status. Missing a required withdrawal, which can bring penalties. And forgetting to name your own beneficiaries on the inherited account. None of these mistakes is hard to avoid once you know the rules, and most are difficult to undo after the fact.
What should you do first?
Take a breath. Very little about an inherited IRA has to happen overnight, and rushed decisions cause most of the problems. Gather the account information, confirm how the account will be titled, and talk with someone who understands both the tax rules and how the account fits into your broader picture as a California resident.
In summary
An inherited IRA comes with deadlines and tax choices that deserve a thoughtful look before you touch the money. Our Calabasas estate attorneys can help you understand your options and coordinate with your tax advisor so the account does what your loved one intended. Give us a call at (818) 334-2805.