Can Siblings Split an Inherited IRA

Losing a loved one is hard enough without adding financial complications to the mix. If you and your siblings have inherited an IRA (Individual Retirement Account), navigating the next steps can feel overwhelming. Fortunately, the answer to a common question—Can an inherited IRA be split between siblings?—is a straightforward yes. But while dividing the account is possible, the process comes with a host of rules, regulations, and potential pitfalls. In this blog post, we’ll break down what an inherited IRA is, why splitting it can be beneficial, the IRS rules you need to follow, and how to avoid costly mistakes.

What is an Inherited IRA?


At its core, an inherited IRA functions like a regular IRA. The funds in the account grow tax-deferred, and distributions may be taxable or tax-free depending on whether the account is a traditional or Roth IRA. However, once an IRA is inherited, certain rules apply, especially when it’s passed down to non-spouse beneficiaries like siblings.

While spouses can simply absorb an inherited IRA into their own account, children or other beneficiaries must create a special type of account known as a beneficiary IRA. These accounts are designed to receive and manage the funds from the inherited IRA.

How Does Splitting Work?


Yes, an inherited IRA can be split between siblings. Here’s how it works:

1) Separate Accounts Must Be Created:
Each sibling will need to set up their own inherited IRA, often called a "beneficiary IRA." This ensures that each beneficiary can manage their portion of the account independently.

2) Equal or Unequal Splits:
The split doesn’t necessarily have to be equal. It will follow the percentage allocations specified by the original account holder. For example, if the IRA owner designated 50% to one sibling and 25% to each of the other two siblings, those proportions must be honored.

3) Timing is Important:
The process of splitting the account into separate inherited IRAs should ideally be done by December 31 of the year following the account holder’s death. This ensures that each sibling has control over their required minimum distributions (RMDs) based on their own life expectancy.

Why Split an Inherited IRA?


Splitting an inherited IRA is often the simplest and most equitable solution, especially when multiple siblings are involved. Here's why:
  • Avoid Conflict: Splitting the IRA ensures that each sibling has control over their share, reducing the potential for disagreements over investments or distributions.
  • Follow the Deceased’s Wishes: The deceased’s designated beneficiaries (likely outlined on the IRA account) take precedence over any other inheritance discussions or even probate rulings. Splitting the account respects these wishes.
  • Streamline Distribution: Each sibling can independently decide how and when to take distributions, as long as they meet IRS requirements.

IRS Rules for Splitting Inherited IRAs


When splitting an inherited IRA, it’s crucial to follow IRS guidelines to avoid penalties:

1) Beneficiary Categories:
  • Eligible Designated Beneficiaries: Includes spouses, minor children, chronically ill or disabled individuals, or beneficiaries not more than 10 years younger than the account holder.
  • Designated Beneficiaries: Most siblings fall into this category.
Sibling heirs typically fall under the 10-Year Rule, meaning all funds must be withdrawn within 10 years of the original account holder’s death.

2) Required Minimum Distributions (RMDs):
  • Non-spouse beneficiaries, like siblings, must take annual distributions based on IRS life expectancy tables.
  • Even with the 10-Year Rule, you cannot wait until the 10th year to withdraw all the funds—you must take annual RMDs.

3) Deadline to Split:
Transfers to individual beneficiary IRAs must be completed by December 31 of the year following the IRA owner’s death.

How to Split an Inherited IRA Between Siblings?


The process of dividing an inherited IRA is relatively straightforward if you follow these steps:

1) Verify Beneficiaries:
Ensure the account designates all siblings as beneficiaries. If this information is unclear or missing, the account may need to go through probate court.

2) Set Up Beneficiary IRAs:
Each sibling must open their own beneficiary IRA to receive their portion of the funds.

3) Transfer Funds:
The IRA custodian will divide the assets based on the proportions outlined by the deceased. This transfer is tax-free as long as the funds remain within beneficiary IRAs.

4) Begin RMDs:
Once the accounts are split, each sibling is responsible for managing their own RMDs and adhering to the 10-Year Rule.

Tax Implications of Splitting an Inherited IRA


Splitting the IRA itself doesn’t trigger taxes, but withdrawing funds from it does.
  • Traditional IRA: Distributions are fully taxable as income.
  • Roth IRA: Distributions are tax-free as long as the account has been open for at least five years.
Failure to adhere to RMD rules can result in significant penalties:
  • A 25% penalty applies to missed RMDs (reduced to 10% if corrected within two years).
  • If the 10-Year Rule is violated, a 50% penalty is levied on the remaining balance.

Common Mistakes to Avoid


  • Missing the December 31 Deadline: Transfers to individual beneficiary IRAs must be completed by the year after the original owner’s death.
  • Skipping the Beneficiary Form: If the account holder didn’t name beneficiaries, the IRA might pass to the estate, complicating the process and potentially subjecting the account to probate.
  • Skipping RMDs: Forgetting to take annual distributions can lead to stiff penalties.
  • Ignoring the 10-Year Rule: Failing to empty the account within 10 years results in severe tax consequences.
  • Ignoring Tax Consequences: Withdrawals from a traditional inherited IRA are taxed as ordinary income, so planning is crucial to avoid a surprise tax bill.

Best Tip: Work With a Professional

Managing an inherited IRA can be complex, especially when splitting it among siblings. To avoid costly mistakes and ensure compliance with all IRS rules, consider working with a financial advisor or tax professional.

The process of inheriting an IRA often comes with emotional challenges. Having a professional by your side can alleviate some of the stress while ensuring the legacy of your loved one is handled with care.

Final Thoughts:
Splitting an inherited IRA among siblings is entirely possible, but it requires careful planning and strict adherence to IRS rules. By dividing the account fairly, respecting deadlines, and managing distributions properly, you and your siblings can navigate this process smoothly while honoring your loved one’s wishes. If you’re ever unsure about what steps to take, don’t hesitate to seek professional guidance—when it comes to financial decisions, it’s better to be safe than sorry.