Receiving an Inheritance: Common Financial Mistakes to Avoid

By Johnathan Horman

An inheritance rarely shows up like a windfall. It usually arrives in the middle of a difficult year, attached to a parent's name on an account statement, with a stack of paperwork you knew nothing about. Grief and money decisions don't mix well, and that combination is exactly why so many inheritance mistakes happen in the first 12 months.

The financial side can get complicated fast. As examples:

• An inherited IRA comes with its own withdrawal rules that are unfamiliar to most people.
• Inherited real estate carries a different tax basis than what your parents paid for it decades ago.
• A life insurance payout behaves differently than a brokerage account.

None of these assets follow the same playbook, and treating them like one lump sum is often where the trouble starts. This is when working with an experienced team of wealth managers can make all the difference. Here are common mistakes we see people make with inherited money.

Cashing Out an Inherited Retirement Account Too Quickly

Many people inherit an IRA or 401(k) and assume the cleanest move is to liquidate it and be done with the decision. However, under current IRS regulations (such as the SECURE Act), non-spouse beneficiaries face strict distribution timelines that require careful math:

• The 10-year rule: Most non-spouse beneficiaries must entirely empty an inherited retirement account by the end of the tenth year following the original owner's death.
• The annual RMD trap: A common misconception is that you can simply wait until year 10 to withdraw everything. Under finalized IRS rules, if the original owner had already started taking required minimum distributions (RMDs), you must also take annual RMDs in years 1 through 9, before emptying the remainder in year 10.

If you're still working and in your peak earning years, a single large withdrawal gets taxed as ordinary income on top of your salary. A $400,000 inherited IRA pulled out in one year can push a high earner into the top federal bracket, trigger the net investment income tax, and in some states add a large state tax bill on top of it.

Spreading withdrawals across several years (ideally in years when your income dips) usually keeps more of that money out of the hands of the IRS.

Overlooking the Step-Up in Basis on Inherited Property

When you inherit a house, a brokerage account, or other appreciated property, the cost basis typically resets to the asset's value on the date of death. That step-up can erase decades of capital gains for tax purposes. The mistake comes when heirs sell quickly without confirming the new basis, sometimes paying capital gains tax on growth they never needed to report.

To avoid losing a huge tax break, get a date-of-death valuation in writing, whether that's an appraisal on a house or account statements showing market value on the date your loved one passed. Without it, you're stuck guessing later, often with the IRS asking the questions.

Letting the Inheritance Push You Into a Higher Tax Bracket Without a Plan

This is where high-income inheritors run into trouble most often. Between a six-figure salary, an inherited IRA distribution, and the sale of an inherited asset in the same year, it's easy to stack three taxable events into one tax return, even if the sale of the asset may not mean much in capital gains taxes.

IRMAA surcharges on Medicare premiums, phased-out deductions, and a higher capital gains rate can all show up at once, and many people don't see it coming until the tax bill arrives the following spring. Coordinating the timing of withdrawals, asset sales, and even charitable giving across more than one tax year tends to soften that blow considerably.

Paying Off Debt or Making Big Purchases Before Mapping Out the Whole Picture

Paying off a mortgage or buying a new car with inheritance money isn't wrong on its own. The mistake is doing it before understanding the tax consequences of how that money was raised.

If a large IRA withdrawal funded the purchase, you may have just paid ordinary income tax rates on money that could have grown tax-deferred for years, or come out more efficiently over time.

Skipping a Beneficiary and Estate Update of Your Own

An inheritance often changes your own estate plan, yet it's the step people forget most. New assets need beneficiary designations. A larger estate may now benefit from trust planning your previous estate documents never anticipated.

If the inheritance includes real estate or a business interest, your CPA and estate attorney both need updated information, not just your wealth advisor.

Strategies to Avoid These Mistakes

A few habits go a long way toward avoiding inheritance regrets:

• Wait before deciding. Park the money in cash or a low-risk account for a few months before making permanent decisions. Grief and good financial judgment don’t typically coexist in the first weeks.
• Get a written valuation for every inherited asset. This shields your step-up in basis and gives your advisor real numbers to plan around.
• Spread out inherited IRA withdrawals. Model out several years of income with your tax bracket in mind instead of pulling the account in one shot.
• Loop in your CPA, your wealth advisor and an estate attorney early. A coordinated team catches the interactions between taxes, beneficiary designations, and your existing plan that a single professional might miss.

The First 90 Days: An Inheritance Checklist

Instead of rushing into major portfolio changes or luxury purchases, use this chronological framework to preserve your assets during the critical transition period.

Days 1 to 30: Pause and Organize

• Give yourself time: Avoid making any immediate commitments to buy, sell, invest, or give away money.
• Gather documentation: Secure certified copies of the death certificate, the will, trust documents, and recent statements for all inherited financial accounts.

Days 31 to 60: Establish New Valuations

• Order real estate appraisals: If real estate is involved, hire a licensed appraiser to determine the fair market value as of the date of death to solidify your step-up in basis.
• Inventory the assets: Classify what you’ve received by type (taxable brokerage accounts, tax-deferred IRAs, tax-free life insurance cash, or physical property), as each has distinct rules.

Days 61 to 90: Build Your Tax and Advisory Strategy

• Map your tax brackets: Sit down with a professional to project how future inherited IRA distributions will interact with your current employment income.
• Align with long-term goals: Determine how this capital can serve your existing financial plan, whether that means accelerating retirement, funding education, or paying down high-interest debt.

Bring Your Inheritance Into a Coordinated Plan

An inheritance is rarely just one decision. It's a retirement account with distribution rules, a property with a new basis, and a tax return that may look very different than it did last year, all arriving at once. Correct Capital works with retirees and business owners navigating exactly this kind of moment, coordinating with your CPA and estate attorney so the inherited assets work with your broader plan instead of against your tax bracket. Learn more about what we do for clients, or get to know the advisory team handling that coordination.

When you're ready to talk through your situation, schedule a conversation with the team. Call (314) 930-4015 or email info@correctcap.com.

Frequently Asked Questions

Do I have to pay income tax on an inheritance?

Generally, inherited cash and life insurance proceeds aren't taxed as income. Inherited retirement accounts are different. Withdrawals from an inherited IRA or 401(k) are taxed as ordinary income to the beneficiary, which is why timing those withdrawals matters so much.

What is the step-up in basis, and why does it matter?

When you inherit an appreciated asset like a house or stock, the cost basis usually resets to its value on the date of death rather than what the original owner paid. That can significantly reduce or eliminate capital gains tax if you sell, but only if you can document that value.

How long do I have to withdraw money from an inherited IRA?

Most non-spouse beneficiaries must empty an inherited IRA within 10 years under current rules, though some accounts also require withdrawals in specific years depending on the original owner's age. The rules vary based on your relationship to the deceased, so it's a good idea to confirm your specific timeline before withdrawing anything.

About Johnathan

Johnathan Horman is a Lead Financial Advisor and Retirement Plan Specialist at Correct Capital Management in Clayton, Missouri. He helps families and business owners invest with confidence, pairing an analytical approach with a calm, consistent commitment to simplifying the complex. He holds an MBA from Saint Louis University and a finance degree from Truman State University, is a registered investment advisor representative (Series 65, life insurance), and sharpened his skills in retirement planning and portfolio management at firms including Wells Fargo Advisors and Northwestern Mutual.

Disclosures: The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security and are subject to change. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

Correct Capital Wealth Management LLC is not a law firm and does not provide legal advice to clients. All Estate planning document preparation and other legal advice are provided through select third parties.

Correct Capital Wealth Management, LLC is a registered Investment Adviser registered with the U.S. Securities & Exchange Commission. Advisory services are only offered to clients or prospective clients where Correct Capital Wealth Management, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Correct Capital Wealth Management, LLC unless a client service agreement is in place.