Inheriting an IRA: Why “Simple” Retirement Accounts Often Create Serious Legal Problems

December 2025 | By Jonathan S. Ro, Esq., Ro Law Firm | jonathan@jsr-law.com

When someone inherits an IRA, the experience is often bittersweet. The account represents a loved one’s legacy, and at the same time it raises practical questions: How do I access the money? Do I have to take it now? What are the tax consequences?

What many beneficiaries do not realize is that inherited IRAs are among the most legally sensitive assets a person can receive. Unlike inherited real estate or bank accounts, a single misstep with an IRA can quietly trigger large tax bills, IRS penalties, or even litigation—sometimes years after the original owner’s death.

As attorneys practicing in California and Nevada, we regularly see these issues arise not because someone acted recklessly, but because the rules governing inherited IRAs are complex, counterintuitive, and unforgiving.

A Common Starting Point: “I’ll Just Move It Into My IRA”

One of the most frequent problems begins immediately after death. A beneficiary assumes that inheriting an IRA works like inheriting other assets and tries to consolidate accounts by rolling the funds into their own IRA or retitling the account in their own name.

Unfortunately, for most beneficiaries this is a costly mistake. Inherited IRAs must be held in a specially titled account that preserves the decedent’s name and date of death. If the inherited funds are treated as the beneficiary’s own retirement account—even unintentionally—the IRS treats the entire balance as distributed and taxable in that year. There is no appeal process and no way to reverse the transaction once it occurs.

This type of error is particularly painful because it often happens early, before the beneficiary has even had time to speak with counsel or a tax advisor.

The 10-Year Rule: Flexibility That Can Backfire

Under current federal law, most non-spouse beneficiaries must fully withdraw an inherited IRA within ten years of the original owner’s death. At first glance, this sounds flexible—and it is. The beneficiary can choose when and how much to withdraw during that ten-year window.

But flexibility without planning can be dangerous. Many beneficiaries delay distributions, assuming they can simply take everything at the end of the ten years. When year ten arrives, they discover that withdrawing a large balance in a single year can push them into much higher tax brackets, trigger additional Medicare premiums, or increase state tax exposure. What was intended as a long-term benefit suddenly becomes a tax shock.

In some cases, the rules are even more complicated. If the original IRA owner had already begun required minimum distributions, annual withdrawals may still be required during the ten-year period. Missing those required distributions can lead to IRS penalties that compound over time.

Penalties That Appear Years Later

One of the most frustrating aspects of inherited IRA mistakes is that the consequences often do not show up immediately. A beneficiary may go several years without taking a required distribution, believing no annual withdrawal is necessary. Only later—sometimes after a change in IRS enforcement or an audit—does the problem surface.

The penalty for failing to take a required distribution can be significant, and while recent law allows for penalty reductions if the error is corrected, the process is stressful and not guaranteed. When an executor or trustee is involved, missed distributions can also become the basis for claims that the fiduciary breached their duties.

Family Disputes Over “Who Gets the IRA”

Unlike most estate assets, IRAs do not pass according to a will or trust. They pass according to the beneficiary designation on file with the financial institution. This disconnect is a frequent source of family conflict.

We regularly see situations where a will leaves “everything equally” to children, but an IRA beneficiary form—often signed years earlier—names only one child, or even an ex-spouse. When the account owner dies, the financial institution is legally required to follow the beneficiary designation, even if it contradicts the rest of the estate plan.

These disputes can lead to interpleader actions, frozen accounts, and litigation between family members who are already dealing with loss. In many cases, the conflict could have been avoided with better coordination between the estate plan and beneficiary designations.

Creditor and Divorce Exposure: An Unexpected Risk

Many people assume that because IRAs are “retirement accounts,” they are fully protected from creditors. While that is often true for a person’s own IRA, inherited IRAs are treated very differently under the law.

In bankruptcy, civil judgments, or divorce proceedings, inherited IRAs may be exposed in ways that surprise beneficiaries. This can be particularly problematic when a beneficiary inherits a large IRA during a period of financial or marital instability.

When a Trust Inherits an IRA, the Stakes Are Higher

Trusts are often named as IRA beneficiaries to provide control, creditor protection, or structure for younger or vulnerable beneficiaries. However, if the trust is not drafted with inherited IRA rules in mind, the tax consequences can be severe.

Poorly structured trusts can force accelerated distributions, leading to rapid taxation and frustrated beneficiaries. Trustees who misunderstand these rules may inadvertently expose themselves to claims for financial harm caused by avoidable tax acceleration.

The High Cost of “Fixing It Later”

Perhaps the most important theme with inherited IRAs is that many mistakes cannot be fixed after the fact. Disclaimers must be made within strict time limits. Account titling errors can permanently destroy tax deferral. Missed deadlines can result in penalties even if the beneficiary acted in good faith.

A Practical Takeaway

If you have inherited an IRA, or expect to in the future, the safest approach is to pause before taking action. Do not rely solely on financial institutions for guidance, and do not assume the rules are intuitive.

A short legal and tax review at the beginning—before accounts are retitled or distributions are taken—can prevent irreversible mistakes and preserve the value of what your loved one intended to leave you.

Ro Law Firm advises clients throughout California and Nevada on inherited IRA matters. For guidance tailored to your situation, contact us at (725) 222-0236.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by reading this article or contacting the firm without a signed engagement agreement.