Inherited IRA Mistakes That Can Cost You Six Figures
A clear guide for high-income heirs—especially in Pasadena, San Marino, Arcadia, La Cañada, South Pasadena, and Greater Los Angeles.
Receiving an inheritance is emotional and complex. Inherited IRAs have rules that differ from your own retirement accounts, and the tax timeline can be unforgiving—especially for high earners in California. This page highlights the most expensive mistakes and how to avoid them.
Quick Answer: What’s the biggest mistake with inherited IRAs?
Rushing to withdraw money without a plan. Many non-spouse heirs must empty the account within 10 years; taking large withdrawals during your highest-income years can trigger avoidable federal and California taxes.
Top 7 Expensive Inherited IRA Mistakes
1) Cashing out right away
Lump-sum withdrawals can push you into top federal brackets and add up to 13.3% California tax. A thoughtful, year-by-year approach typically preserves more of the inheritance.
2) Treating Roth and Traditional the same
| Type | Common confusion | Better approach |
|---|---|---|
| Traditional (Inherited) | “I’ll wait until year 10.” | Spread withdrawals to manage brackets. |
| Roth (Inherited) | “No taxes, I’ll take it now.” | Let it grow tax-free before emptying within the window. |
3) Missing the 10-year rule
Most non-spouse heirs must empty the account within 10 years. Waiting and liquidating in year 10 often creates a tax spike—painful for FAANG employees, physicians, and entrepreneurs with variable income.
4) Incorrect titling or transfers
One wrong move can be treated as a full distribution. Keep the account titled as an Inherited IRA (unless you’re a spouse choosing otherwise) and verify custodian setup.
5) Forgetting California tax impact
California taxes most Traditional IRA withdrawals as ordinary income, stacking on top of federal rates. Planning matters more in high-tax geographies like LA and the San Gabriel Valley.
6) Ignoring investment strategy inside the account
Fear or grief can lead to inaction. Reassess risk, need for liquidity, and opportunities to keep a portion invested while you phase withdrawals.
7) Going it alone
DIY errors are costly and often irreversible. Coordinate with a fiduciary advisor and tax professional before you touch the funds.
What To Do Instead (Simple Checklist)
- Pause first: Don’t withdraw until you understand the tax impact.
- Confirm beneficiary status: Spouse vs non-spouse vs trust.
- Map your 10-year runway: Plan distributions across lower-income years.
- Review investments: Align risk to timeline and goals.
- Coordinate taxes: Consider NIIT, CA brackets, bonus/RSU years.
- Document annually: Revisit as income and markets change.
California Example
Profile: Tech professional in Pasadena earning $350K + RSUs; inherits a $600K Traditional IRA.
| Approach | Estimated taxes paid | Estimated after-tax amount |
|---|---|---|
| All in year 10 | ≈ $270,000+ | ≈ $330,000 |
| Planned over 10 years | ≈ $150,000–$180,000 | ≈ $420,000–$450,000 |
These are illustrative only. Actual outcomes depend on income, filing status, deductions, market returns, and future tax law.
Serving Heirs Across Los Angeles & the San Gabriel Valley
We regularly assist families in Pasadena, San Marino, Arcadia, La Cañada Flintridge, South Pasadena, and Greater Los Angeles—including tech, healthcare, law, and business professionals navigating legacy planning.
Talk Through Your Options (15 Minutes)
Quiet, no-pressure help to map a plan that honors the gift and minimizes taxes over the next decade.
Schedule a call · Learn more about our financial planning process.
Compliance Note: Educational only—this is not tax, legal, or investment advice. Rules may change and individual circumstances vary. Consult a qualified tax professional before taking action.