10 Inherited IRA Mistakes That Cost Beneficiaries Thousands

Inherited IRA rules are among the most technically complex in the tax code. Since the SECURE Act (2020) and the IRS's final regulations in T.D. 10001 (2024), even tax-savvy beneficiaries regularly make costly errors. Here are the ten most expensive — what they cost and what to do if you've already made one.

Mistake 1: Attempting a 60-day rollover

Your own IRA allows 60-day rollovers: you take a distribution, and if you redeposit the funds at another IRA custodian within 60 days, there's no tax event. Non-spouse inherited IRA beneficiaries cannot do this. IRC § 408(d)(3)(C) expressly prohibits 60-day rollovers of inherited IRA funds.¹

The consequence: if a non-spouse beneficiary receives an inherited IRA distribution and attempts to deposit it at a new custodian as a "rollover," the entire distribution is treated as a taxable distribution in the year received. It cannot be undone. The 60-day window that would save an own-IRA transaction simply does not exist for inherited accounts.

How to move an inherited IRA: Use a direct trustee-to-trustee transfer only. The funds move custodian-to-custodian without ever touching your hands. This is not a rollover — it is a transfer — and it is the only permissible method for non-spouse beneficiaries.

Surviving spouses are the sole exception. A surviving spouse may roll an inherited IRA into their own IRA via 60-day rollover or direct transfer, which converts it to an owned IRA subject to regular (more favorable) RMD rules. See the spousal rollover decision guide for the full picture.

Mistake 2: Missing the September 30 beneficiary determination date

When an IRA owner dies with multiple named beneficiaries, the question of which rules govern each beneficiary's distributions is resolved by looking at who is still a beneficiary on September 30 of the year following the year of death — the "beneficiary determination date."²

Why this matters: if one of the co-beneficiaries is a non-designated beneficiary (an estate, a charity, or a non-qualifying trust), the entire account loses the ability to use life expectancy stretch calculations and falls into the shorter 5-year or ghost-life-expectancy rule — even for the individual co-beneficiaries who have their own life expectancy. The non-designated beneficiary "poisons" the pool.

The fix: A co-beneficiary can be eliminated from the beneficiary pool before the September 30 date by receiving a full distribution of their share or by the co-beneficiary filing a qualified disclaimer under IRC § 2518. If a non-designated beneficiary (like an estate) is on the account, consult an advisor immediately — the September 30 deadline may offer a cure window.

Note: for most non-spouse beneficiaries subject to the SECURE Act 10-year rule, the September 30 date matters primarily for the annual RMD question (pre-RBD vs. post-RBD decedent analysis and whether the oldest-beneficiary factor applies before separate accounts are established). See the multiple beneficiaries guide.

Mistake 3: Missing the December 31 separate accounts deadline

When two or more beneficiaries inherit the same IRA, each can establish their own "separate account" — a sub-account within the original IRA that allows each beneficiary to use their own life expectancy factor for annual RMD calculations (if applicable) rather than being stuck with the oldest beneficiary's shorter factor.²

The deadline: separate accounts must be established at the custodian by December 31 of the year following the year of death. Miss it, and all beneficiaries are forced to use the oldest co-beneficiary's single life expectancy factor for any annual RMDs that apply. For a 45-year-old beneficiary sharing an account with a 70-year-old beneficiary, this can meaningfully increase the annual RMD obligation.

What "established" means in practice: the custodian must actually reflect the separate accounting by December 31 — not just a form submitted on December 30. Start the process at least 30–45 days before the deadline to allow for custodian processing time.

The separate accounts rule does not change the 10-year depletion deadline under the SECURE Act — all non-EDB beneficiaries still must fully deplete their share by December 31 of the 10th year after the original owner's death. Separate accounts only affect the annual RMD calculation during years 1–9 when annual distributions are required (post-RBD decedent scenario).

Mistake 4: Skipping annual RMDs during the 10-year window

The most widespread post-SECURE Act misconception: that the 10-year rule simply means "deplete by year 10, no annual minimums required." This is wrong for a large category of beneficiaries.

Under IRS final regulations T.D. 10001 (published July 2024), non-EDB beneficiaries who inherit from an original IRA owner who had already reached their Required Beginning Date (RBD) — age 73 for anyone born 1951–1959, age 75 for those born 1960 or later — must continue to take annual RMDs during years 1–9 of the 10-year window. These annual RMDs are calculated using the Single Life Expectancy Table.³

The IRS issued waivers covering annual RMDs for tax years 2021, 2022, 2023, and 2024 (Notice 2022-53, Notice 2023-54, Notice 2024-35). Those waivers are over. For tax year 2025 and forward, annual RMDs are mandatory for post-RBD-decedent inherited IRAs, with no further waiver expected.

The cost of skipping: Under IRC § 4974 and SECURE 2.0 Act § 302, the excise tax on a missed RMD is 25% of the shortfall. If you file Form 5329 and self-correct within the IRS "correction period" (generally two years), the rate drops to 10%. You can also request a reasonable-cause waiver.⁴ See the missed RMD remediation guide for the Form 5329 process.

How to determine if your inherited IRA requires annual RMDs: Ask whether the original owner had already reached RBD (crossed into required minimum distribution age) before they died. If yes, annual RMDs are required during your 10-year window. If they died before RBD, you have no annual minimum — just the 10-year depletion deadline. See the RMD rules guide for the full analysis.

Mistake 5: Deferring all distributions to year 10

Some beneficiaries — particularly those who don't need the money immediately — instinctively decide to let the inherited IRA grow tax-deferred for the full 10 years and then take a single lump-sum distribution in year 10. This is almost always the most expensive strategy available, for two reasons:

Income tax compression. A $900,000 inherited IRA growing at 6% for 10 years reaches approximately $1.6M. Taking $1.6M as ordinary income in a single year means the entire amount stacks on top of all other income, pushing every dollar into the highest tax brackets. At a $250,000 ordinary income base, the first $100K of additional income may go into the 32% bracket and the remaining $1.5M into the 35–37% brackets. Equal annual distributions of roughly $128K, by contrast, might all fall within the 22–24% bracket range, depending on other income.

Medicare IRMAA amplification. For beneficiaries age 63 or older at the time of the distribution, a year-10 lump sum can spike Medicare Part B and Part D premiums for two years (IRMAA uses a two-year lookback). A $1.6M distribution triggers maximum-tier IRMAA — adding up to $5,844/year per Medicare beneficiary for two years for Part B alone, plus Part D surcharges. See the IRMAA planning guide.

Social Security taxation amplification. If you receive Social Security benefits during the year of the year-10 distribution, the lump sum pushes your provisional income far above the 85% inclusion threshold (IRC § 86: $34,000 single / $44,000 MFJ). Up to 85% of your Social Security becomes taxable — at your marginal rate. In the 85% zone, the effective marginal rate on each additional inherited IRA dollar can exceed 40% for a 22% bracket filer. See the Social Security coordination guide.

The alternative — spread distributions strategically across years 1–10, filling tax brackets optimally each year — almost always produces a lower total tax bill even though it accelerates distributions. The 10-year withdrawal optimizer calculator lets you model equal, front-loaded, and back-loaded strategies side by side.

Mistake 6: Using the wrong account title format

An inherited IRA must be titled in a specific format that reflects both the original owner's name and the beneficiary's status as inheritor. The standard format is:

[Original Owner Name], deceased [date of death], IRA FBO [Your Name], Beneficiary

"FBO" stands for "for benefit of." The exact wording varies by custodian, but the critical elements are: (1) original owner's name is present, (2) the account is identified as an inherited/beneficiary account, and (3) it is not titled in your name alone as if it were your own IRA.

Why it matters: A custodian that receives a check made out in only your name — without the FBO inherited IRA notation — may treat it as a regular contribution or a prohibited 60-day rollover. If the account is titled in your name alone as a new IRA, you lose the inherited IRA's death-exception protection from the 10% early withdrawal penalty, and the custodian's system may apply own-IRA RMD rules rather than inherited-IRA rules.

If you find your inherited IRA is titled wrong: Contact the custodian immediately. A re-titling before any distributions are taken may be possible without tax consequence. Once distributions have been reported on Form 1099-R under the wrong account type, the fix becomes more complex.

Mistake 7: Assuming inherited Roth IRA distributions are always tax-free

Inherited Roth IRA distributions are indeed income-tax-free — but only if the original Roth IRA's 5-year rule is satisfied. The rule: the original owner must have established the Roth IRA account at least five years before the year of death for the earnings (not contributions) to be distributed tax-free.

The key point: you, as a beneficiary, inherit the original owner's 5-year clock — not your own. If your parent opened a Roth IRA in 2022 and died in 2024, the 5-year rule is not satisfied until 2027 (five years from 2022). Any earnings you withdraw before 2027 are taxable — even though it's a Roth IRA.

Contributions (as opposed to earnings) are always distributable tax-free from a Roth IRA, regardless of the 5-year rule. The question is only about accumulated earnings in the account.

The other Roth mistake: Many inherited Roth IRA beneficiaries don't realize the SECURE Act 10-year rule applies to them too. Unlike the original owner — who never had to take RMDs from a Roth IRA during their lifetime — non-EDB beneficiaries must fully deplete an inherited Roth IRA by December 31 of the 10th year after the original owner's death. The optimal strategy is often to defer all distributions to year 10 (if the 5-year rule is satisfied, all distributions including earnings are tax-free), but you cannot simply leave the account untouched indefinitely. See the inherited Roth IRA guide for the full picture.

Mistake 8: Spousal rollover before age 59½

A surviving spouse has two choices: treat the inherited IRA as their own (roll it over to their own IRA) or maintain it as an inherited IRA in their capacity as a surviving spouse beneficiary.

The trap: once you roll an inherited IRA into your own IRA, the accounts merge and the inherited-IRA rules no longer apply. Your own IRA does not have the death exception to the 10% early withdrawal penalty. If you are under 59½ and you roll the inherited IRA into your own IRA, any distributions you take from the combined account before age 59½ will incur the 10% early withdrawal penalty — unless another exception applies.

The inherited IRA alternative: a surviving spouse who keeps the account as an inherited IRA can take distributions at any age without the 10% penalty. The death exception under IRC § 72(t)(2)(A)(ii) applies to inherited IRAs regardless of the beneficiary's age. If you are a 47-year-old surviving spouse who needs the money before age 59½, staying in inherited IRA status preserves penalty-free access.

The strategic timing: a surviving spouse can maintain inherited IRA status until shortly before age 59½, take any needed pre-59½ distributions penalty-free from the inherited account, and then roll the remainder into their own IRA. This combines the best of both worlds: penalty-free access now, and more favorable own-IRA RMD rules later. See the spousal rollover guide for the full four-scenario decision framework.

Mistake 9: Ignoring state inheritance tax

Federal income tax on distributions from an inherited IRA is widely understood. What catches many beneficiaries by surprise is that some states impose a separate inheritance tax — not an income tax on the distributions, but a transfer tax on the account balance at the time of the original owner's death, simply because it changed hands.

As of 2026, five states impose an inheritance tax on IRA accounts: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax rates vary by beneficiary class: in most of these states, direct descendants (children, grandchildren) pay lower rates or are exempt entirely, while more distant relatives or unrelated beneficiaries pay higher rates.⁵

Pennsylvania is the counter-intuitive case: it does impose inheritance tax on IRA accounts (at rates of 4.5% for children, 12% for siblings, 15% for others), but it does not impose state income tax on IRA distributions. So a Pennsylvania beneficiary pays a one-time inheritance tax on the balance but receives ongoing distributions income-tax-free at the state level.

The deadline issue: most state inheritance tax returns are due 9 months from the date of death — the same as the federal estate tax return. If you are a beneficiary of an inherited IRA in one of these five states, the tax obligation may fall on you (not the estate), and the deadline may be approaching. See the state taxes guide for per-state rates and rules.

Mistake 10: Not coordinating own-IRA Roth conversions during the 10-year window

This is the strategy mistake, as opposed to a procedural error — and it costs beneficiaries the most in missed opportunities. Most beneficiaries in their 40s, 50s, and 60s have two tax-deferred buckets: the inherited IRA and their own traditional IRA or 401(k). Many treat them as independent problems and optimize each in isolation. The more effective approach coordinates the two.

The core insight: non-spouse beneficiaries cannot convert their inherited IRA to a Roth IRA (IRC § 408(d)(3)(C) prohibition — see Mistake 1). But they can use the inherited IRA distributions to reduce their reliance on their own IRA during the 10-year window, freeing up room to convert their own IRA to Roth at lower tax costs.

Example: you are 52, in the 22% bracket, with a $400,000 inherited IRA and a $600,000 own traditional IRA. If you take only the inherited IRA distributions (say, $40,000/year at equal distribution) and leave your own IRA untouched, your own IRA keeps compounding. But you have no ability to convert it to Roth tax-efficiently while your income is already filled with inherited IRA withdrawals.

A better approach: model your 22% bracket ceiling each year. If your total income (earned, SS, dividends) plus the inherited IRA distribution leaves room in the 22% bracket, fill that room with Roth conversions from your own IRA. You're converting your own IRA tax — at 22% — during the 10-year window when income from the inherited IRA is predictable and plannable. The result: by year 10, your own IRA has a much larger Roth component, and your surviving-spouse or eventual-estate position is significantly better. See the Roth Conversion Coordinator calculator to model this side by side.

If you've made one of these mistakes

Not all of these mistakes are reversible, but more are fixable than most people assume:

• Missed annual RMD: file Form 5329 Part IX, self-correct by taking the shortfall, and request a reasonable-cause waiver. The IRS has been generally favorable on inherited-IRA waiver requests given the complexity of T.D. 10001. See missed RMD guide.
• Wrong title format: contact the custodian immediately. A re-titling before distributions is often possible.
• 60-day rollover (already executed): this is largely irreversible. Consult a tax professional about whether any exceptions apply and how to minimize the tax hit via estimated payments and withholding adjustments.
• Missed September 30 or December 31 deadlines: evaluate whether a late correction is possible through the custodian. Some custodians will process late separate accounts with explanation — though the deadline technically governs RMD calculations.
• Year-10 lump sum (not yet taken): there is still time to change course. Spreading distributions across the remaining years, even if you're in year 7 or 8, reduces the compression. Act before year 10 begins.

Sources

1. IRC § 408(d)(3)(C) — 26 U.S.C. § 408(d)(3)(C) — inherited IRA 60-day rollover prohibition for non-spouse beneficiaries.
2. Treasury Regulation § 1.401(a)(9)-4 (beneficiary determination date) and § 1.401(a)(9)-8 (separate accounts) — IRS RMD overview.
3. T.D. 10001 (July 2024) — IRS final regulations under IRC § 401(a)(9) establishing annual RMD requirement for non-EDB beneficiaries of post-RBD decedents. Federal Register, 89 FR 58542. Values verified as of May 2026.
4. IRC § 4974; SECURE 2.0 Act of 2022 § 302 — reduced excise tax from 25% to 10% within the correction period. IRS Form 5329 instructions.
5. State inheritance tax: KY, MD, NE, NJ, PA — Tax Foundation, State Inheritance Taxes. Individual state rates vary by beneficiary class; verify with state revenue department for current rates.

IRC citations and T.D. 10001 rules verified as of May 2026. Tax thresholds (IRMAA, Social Security provisional income) reflect 2026 values per IRS guidance. Confirm current-year figures at IRS.gov before relying on specific amounts.