Advisors say these mistakes with inherited IRAs could reduce your windfall

• Experts say that if you are an heir without a spouse, inherited IRA rules are complex, and mistakes can be costly.

• Many accounts must be emptied within 10 years, and some heirs will need to begin taking required minimum distributions in 2025 to avoid IRS penalties.

• According to Cerulli Associates, planning for inherited IRAs is crucial amid the "Great Wealth Transfer," as more than $100 trillion is expected to be transferred by 2048.

• Although many investors welcome unexpected income, the rules for inherited individual retirement accounts are complex, and mistakes can be costly.

• Starting in 2020, some inherited accounts are subject to the "10-year rule," and heirs must empty the balance by the 10th year after the original account holder's death.

• Additionally, some non-spouse beneficiaries, typically adult children, must begin taking required minimum distributions, or RMDs, over a 10-year period beginning in 2025, or face heavy IRS penalties.

• Planning for inherited IRAs is crucial amid the "Great Wealth Transfer," as more than $100 trillion in assets is expected to be transferred by 2048, according to a December report by Cerulli Associates.

• Here are the three biggest mistakes associated with inherited IRAs and how to avoid them, according to financial advisors.

• 1. Not Knowing IRS Rules

• For non-spouse heirs, “[Inherited IRA] rules can quickly become complicated, and it's important to know your options,” said Brett Koeppel, founder and certified financial planner at Buffalo, New York-based Eudaimonia Wealth.

• The “10-year rule” and new RMD requirements for 2025 apply to most non-spouse beneficiaries, such as adult children, if the original IRA owner reached RMD age before their death.

• If you don't take an inherited IRA RMD for 2025, you may incur a 25% IRS penalty on the amount withdrawn. However, you can reduce that fee to 10% by paying the correct amount within two years and filing Form 5329. In some cases, the IRS may waive the penalty entirely.

2. Not Planning for 'Significant Taxes'

If you inherit a pre-tax IRA, you can expect to pay regular income taxes on withdrawals, which experts say may require tax planning during the 10-year withdrawal period.

Some inheritors aim to withdraw only their RMD amount for the first nine years and a lump sum in the tenth year. But this can mean "significant taxes in the final year of distribution," says CFP John Novak, founder of Aloe Financial Planning, based in Mount Prospect, Illinois. He is also a certified public accountant.

Instead, experts say you should use multi-year tax projections to determine the best withdrawal amount for each year. For example, it may be wise to accelerate distributions during years of temporarily low income.

3. Maintaining the Same Investments

Another common mistake is not replacing inherited IRA assets, according to Jamie Bost, CFP, senior advisor at CGN Advisors, based in Manhattan, Kansas.

Ideally, investments should be consistent with your risk tolerance, goals, and timeframe. "It's your money now and should be allocated according to your needs," he said.

However, Novak of Aloe Financial Planning said that when choosing investments, you should consider your tax liability, annual RMD, and income needs.

For example, he said that certificates of deposit in your IRA, whose maturity date is beyond your RMD period, "may be difficult or expensive to distribute."