Dealing with an inheritance can be challenging, especially when it involves dividing financial assets among siblings. Understanding the Inherited IRA split between siblings is an important part of this process. An Inherited IRA, or Individual Retirement Account, allows beneficiaries to inherit funds from the original account holder while enjoying tax-deferred growth. When a parent passes away and leaves behind an IRA, siblings may find themselves in a position where they need to share this inheritance.
Knowing the steps to take can make a big difference in achieving a smooth transition and fair distribution. This guide will walk you through the entire process, guaranteeing you comply with the rules and make informed decisions about your inheritance.
Before we explore the steps for splitting an Inherited IRA between siblings, it’s essential to understand what an Inherited IRA is and how it works. An inherited IRA is an account that someone sets up to get the money from a person who has died.
It differs from a traditional IRA in that the beneficiaries cannot contribute additional funds to it. Instead, they must take required minimum distributions (RMDs) based on specific rules. This separation helps avoid potential conflicts and assures that each beneficiary can control their distributions and tax planning.
In the case of an Inherited IRA split between siblings, each sibling typically receives a separate account to manage their share. This separation helps avoid potential conflicts and assures that each beneficiary can control their distributions and tax planning.
It’s hard enough to deal with the death of a parent without having to worry about managing assets that were left to you. Families often ask us if they can split an inherited IRA between siblings. The short answer is yes, they can. The money can be split between siblings in a way called an “inherited IRA.” But you need to know a lot more to do this process right and avoid mistakes that will cost you a lot of money.
In this comprehensive guide, we’ll walk you through everything you need to understand about dividing an inherited IRA between siblings, from basic concepts to step-by-step instructions and important tax considerations.
Understanding the Basics of Inherited IRAs
Before we talk about how to divide an IRA between siblings, let’s talk about what an inherited IRA is.
An inherited IRA is an Individual Retirement Account that a beneficiary establishes to receive funds from a deceased person’s IRA. Unlike regular IRAs, beneficiaries cannot make additional contributions to these accounts. Instead, they must follow specific rules for withdrawals and distributions.
People who are named as beneficiaries of an IRA after a parent dies (usually their children) need to know what options they have for managing the money they have been given.
Can Siblings Really Split an Inherited IRA?
Yes, siblings can definitely split an inherited IRA! When multiple siblings are named as beneficiaries of their parent’s IRA, they have options for how to divide the assets:
- Create separate inherited IRAs: Each sibling can transfer their portion into their own inherited IRA account
- Maintain a single joint account: Though possible, this is usually less advantageous due to distribution requirements
- Take lump sum distributions: Withdraw the entire amount upfront (though this has significant tax implications)
Step-by-Step Guide to Splitting an Inherited IRA Between Siblings
Let’s break down the process into manageable steps
Step 1: Determine Beneficiaries and Their Shares
First, make sure you know who the beneficiaries are and how much each sibling should get. The parent’s beneficiary designation form is more important than their will, so look at this first. If there aren’t any set percentages, siblings may have to agree on how to split the money.
Step 2: Set Up Separate Inherited IRA Accounts
Once beneficiaries and their shares are determined, the next step is setting up separate inherited IRA accounts This process must be handled correctly to avoid tax penalties!
Contact the financial institution holding the original IRA and request a transfer of assets into new inherited IRA accounts for each sibling. The account titles should clearly indicate that these are inherited IRAs – for example “Jane Doe Beneficiary of John Doe Deceased.”
⚠️ Important Timing Note: These separate accounts must be established by December 31 of the year following the original account holder’s death. Missing this deadline can have serious tax consequences!
Step 3: Understand the Rules and Tax Implications
The SECURE Act of 2019 significantly changed the rules for inherited IRAs, particularly for non-spouse beneficiaries like adult children:
- 10-Year Rule: Most non-spouse beneficiaries must withdraw the entire inherited IRA balance within 10 years of the original owner’s death
- Required Minimum Distributions (RMDs): You must take annual required minimum distributions from the inherited IRA
- Tax Consequences: Withdrawals from traditional inherited IRAs are taxed as ordinary income in the year they’re taken
These rules can get complicated, and mistakes can be costly. I always recommend consulting with a financial advisor or tax professional who specializes in retirement accounts.
Step 4: Calculate Required Minimum Distributions
Even with the 10-year rule, beneficiaries need to understand their RMD requirements. When siblings share an inherited IRA without splitting it into separate accounts, the IRS bases the RMD calculations on the oldest sibling’s life expectancy – which typically means larger required withdrawals.
This is one big reason why splitting into separate inherited IRAs makes sense – each sibling can use their own life expectancy for calculating RMDs, potentially allowing for smaller required withdrawals and more tax-efficient planning.
Step 5: Decide on a Distribution Strategy
After setting up separate inherited IRAs, each sibling can decide on their own distribution strategy:
- Take equal annual distributions
- Wait and take larger distributions later in the 10-year period
- Withdraw the entire amount at once
The best approach depends on each sibling’s individual financial situation, current and anticipated tax brackets, and cash flow needs.
Common Questions About Splitting Inherited IRAs Between Siblings
What happens if one sibling is a minor?
If one of the siblings is a minor (under 18, 19, or 21 depending on the state), special rules apply. Minor children qualify as “eligible designated beneficiaries” under the SECURE Act, which means they can take distributions based on their life expectancy until they reach the age of majority. After reaching adulthood, the 10-year rule kicks in.
Can siblings decide to split an inherited IRA unequally?
If the IRA beneficiary designation doesn’t specify percentages, siblings could theoretically agree to an unequal split. However, this gets tricky from legal and tax perspectives. Any significant deviation from equal shares might raise questions from the IRS or other interested parties. It’s best to consult with an estate attorney before pursuing this option.
What if siblings can’t agree on how to split the inherited IRA?
If siblings cannot reach an agreement, the division will typically default to the percentages listed on the beneficiary designation form. If no percentages are specified, an equal split is usually assumed. In cases of serious disagreement, legal mediation may be necessary.
Tax Implications of Inheriting an IRA
The tax consequences of inheriting an IRA can be significant and should factor into your decision-making:
- Traditional IRAs: Distributions are taxed as ordinary income
- Roth IRAs: Qualified distributions are generally tax-free if the original account was established more than 5 years before the owner’s death
- State Taxes: Don’t forget that your state may also tax inherited IRA distributions
Stretching distributions over time (rather than taking a lump sum) can help minimize the tax impact by avoiding a large spike in your taxable income for a single year.
Why Splitting an Inherited IRA into Separate Accounts Makes Sense
There are several advantages to splitting an inherited IRA into separate accounts for each sibling:
- Individual control: Each sibling can manage their own investments and distribution schedule
- Personalized tax planning: Each sibling can plan withdrawals according to their own tax situation
- Simplified RMD calculations: Each sibling can use their own life expectancy tables
- Avoiding conflicts: Separate accounts minimize potential disagreements about investment choices or withdrawal timing
- Estate planning flexibility: Each sibling can name their own beneficiaries for their portion
The Importance of Estate Planning
Going through the process of splitting an inherited IRA between siblings highlights how important proper estate planning is. If you’ve inherited an IRA, this might be a good time to review your own estate plan to ensure your assets will be distributed according to your wishes.
Consider creating or updating your will, establishing trusts if appropriate, and reviewing beneficiary designations on all your accounts. Online estate planning services make this process more accessible and affordable than ever before.
Final Thoughts: Communication is Key
Perhaps the most important advice I can give when splitting an inherited IRA between siblings is to maintain open communication throughout the process. Regular discussions about account management, distribution plans, and any changes in financial circumstances can help prevent misunderstandings and preserve family harmony.
Remember that financial decisions made during a time of grief can be particularly challenging. Be patient with yourself and your siblings as you navigate this process together.
Conclusion
So to summarize – yes, an inherited IRA can definitely be split between siblings, and in most cases, creating separate inherited IRA accounts is the recommended approach. This gives each sibling control over their portion and allows for individualized tax planning.
The process involves determining beneficiaries and their shares, setting up separate inherited IRA accounts, understanding distribution rules (particularly the 10-year rule established by the SECURE Act), calculating RMDs, and deciding on a distribution strategy.
Given the complexity of these rules and the significant tax implications involved, we strongly recommend consulting with a financial advisor or tax professional who specializes in retirement accounts and inheritance issues. Their expertise can help ensure you make the most of your inheritance while avoiding costly mistakes.
Have you dealt with splitting an inherited IRA? What challenges did you face? Feel free to share your experiences in the comments below!
Step Six: Keep Communication Open Between Siblings
Splitting an inherited IRA between siblings requires clear and open communication to avoid misunderstandings and disagreements. Regular discussions about account management, distribution plans, and any changes in financial circumstances can help maintain a harmonious relationship among siblings.
Siblings should review their beneficiary designations on all financial accounts, including IRAs, 401(k)s, and life insurance policies, to make sure they align with their current intentions. Regularly updating estate plans can help avoid potential conflicts and ensure that your assets are distributed according to your wishes.
Step One: Determine Beneficiaries and Their Shares
The first step in dividing an Inherited IRA between siblings is determining who the beneficiaries are and what their respective shares will be. The deceased parent’s will or estate plan usually outlines this information. However, it’s important to check the IRA’s beneficiary designation form, as this takes precedence over the will.
Once you have confirmed the beneficiaries, you need to determine the share each sibling will receive. If the IRA account holder designated specific percentages, follow those instructions. If the amount isn’t said, siblings may have to agree on a fair split or come up with another plan.