Aimee E. Calderon, CFP®

While it is never easy to lose a loved one, we all will, unfortunately, experience it, and often that means receiving an inheritance from the one we lost. Receiving an inheritance can be tricky, as it is mixing money and emotions. Avoiding these five common mistakes can make the inheritance process go more smoothly while helping you make informed decisions about the legacy you’ve received.

#1. Withdrawing Funds from an Inherited IRA

Traditional individual retirement accounts (IRAs) are often part of an inheritance, and if you inherit an IRA, you should know the tax rules. Depending on the age of the original account holder, rules vary on when you need to start withdrawing money from the IRA. The penalties can be steep if you don’t take the mandatory withdrawals, so learn the rules and obey them.

Any withdrawal from an inherited IRA is taxed as ordinary income, so if funds are available in a non-retirement account, you may want to consider tapping them before taking a full withdrawal from the IRA. Also, spreading out IRA distributions over your lifetime can keep you in a lower tax bracket than taking a full withdrawal.

#2. Comingling Assets

California is a community property state. “What’s mine is yours and what’s yours is mine”—except when it comes to inheritances. Inheritances in California are considered separate property and can be kept that way assuming you keep the money in your name alone.

While most of our clients are happy to share their inheritance with their spouse, it is important that you know the law and your options. Before depositing an inheritance you have received into a joint account, make sure you understand the rules for separate property so you can make an informed decision.

#3. Spending Through Money

Many of our clients in Orange County have been blessed with inheritances from their parents. Unfortunately, sometimes when clients do not earn the money, they have a different attitude toward it. While their parents worked hard to earn their wealth, the people who inherited it received a nice gift. As a result, our Fullerton financial planning firm sometimes sees these clients spend through the money faster than they should.

Whether you earn the money yourself or not, it is important to have a handle on how long your money needs to last and how much you can reasonably spend every year. We run retirement projections for our clients to help them with these numbers, but it really comes back to the adage “Live within your means.”

While you may want to take a fancy vacation, buy a new house, and quit your job with this newfound wealth, try not to let an inheritance fool you into a false sense of financial security.

#4. Being Too Generous

You’ve seen it on the news: Someone wins the lottery, and “relatives” come out of the woodwork with their hands out. The same can happen with an inheritance.

While we encourage generosity among our clients, especially with charities, it is important to first get a handle on how an inheritance impacts your future before you start writing checks to others. You can also determine what kind of legacy you want to leave to your family members.

#5. Not Getting Good Advice

With all of the mistakes mentioned above, good advice from a professional can help prevent them. Do not try to go it alone. A financial advisor, estate planning attorney, and accountant can form a team to assist you in making wise choices about your inheritance.

Inheritances can bring in all sorts of rules and nuances that professionals are familiar with. From determining which account to start withdrawals from first, to how much you can spend per year, to how this new money should be invested, it is important to seek the help of seasoned professionals.

A CERTIFIED FINANCIAL PLANNER™ professional can help you identify your short-term and long-term financial goals and then draft a financial plan to achieve those goals.

Schedule a 15-minute discovery call with a fee-only financial advisor to discuss your personal situation.