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Is It Possible to Split an IRA?

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Like most assets, you can inherit an individual retirement account (IRA) after the owner’s death. For spouses, inheriting an IRA is a relatively straightforward process.
May 22, 2023 ★ 

If you and a sibling have inherited an IRA, there are several options, says a recent article from yahoo! finance, appropriately titled “My Sibling and I Inherited an IRA. How Do We Split It?” The choices are different than when a spouse inherits an IRA. Making a mistake could be costly, so work with an estate planning attorney familiar with the process.

An IRA is a tax-advantaged retirement account owned and managed by an individual. It’s different from 401(k) accounts, managed through employers. The rules about inheriting an IRA are more complicated than any other form of investment because of the IRA’s tax status. The traditional IRA is known as a “pre-tax” portfolio. This is because you don’t pay taxes on the money invested into the account. You pay taxes on the account’s growth when making withdrawals.

Starting at age 72 or 73, you must take money out of the IRA every year. These are called Required Minimum Distributions (RMDs) and are required by law. The amount depends on your age and the amount in the account. If you inherit an IRA, distributions from the account will still be required.

From a policy perspective, these withdrawals are required to generate tax revenue. Otherwise, people would have “eternal” IRAs, which would continue to grow tax-free for decades and generations.

When siblings inherit an IRA, the first question is whether or not the siblings are “eligible designated beneficiaries.” A beneficiary is a person named in the account to receive it after the owner’s death.  The beneficiary then inherits the account directly. Under the SECURE Act, starting in 2020, certain categories count as “eligible designated beneficiaries.” This includes the spouse, any minor children, disabled or chronically ill individuals and anyone not more than ten years younger than the account owner. Adult children over 18 do not qualify as eligible designated beneficiaries.

Adult siblings may transfer the IRA into an Inherited IRA, using a single account they own jointly, or distribute the IRA among multiple inherited IRA accounts that each owns individually. The transfer must occur by December 31 of the year the IRA was inherited. Once the account is transferred, the siblings have ten years to withdraw and pay taxes on all the money in the inherited IRA account.

If the siblings wish to withdraw and use the assets, they may. However, they must pay ordinary income taxes on the assets, which could be considerable. The tax rate is set based on the sibling’s income for the year.

Minor children inheriting an IRA have another option. Their parent or guardian may transfer the IRA into an inherited IRA and take RMDs based on their life expectancy and the account’s value. The distribution must begin on December 31 of the year when they inherited the IRA. The money is taxed as income. Once the minor child reaches legal age, the ten-year rule applies. They must take all of the money out of the account within ten years of achieving their legal age.

Splitting an IRA between siblings requires the knowledge of an estate planning attorney to make informed decisions to protect the assets and minimize taxes.

Reference: yahoo! finance (April 24, 2023) “My Sibling and I Inherited an IRA. How Do We Split It?”

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