Can an Inherited IRA Be Split Between Siblings?

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Structurally speaking, an inherited IRA is the same as a regular IRA. In other words, assets in the account grow tax-deferred, and distributions are either fully taxable, in the case of inherited traditional IRAs, or tax-free, in the case of inherited Roth IRAs.

But there are important rules that apply to IRAs when siblings inherit them that aren’t otherwise applicable to regular IRAs.

While spouses can simply take over inherited IRAs as their own, other beneficiaries, such as children of the deceased, cannot. Rather, money that is inherited from a parental IRA must instead funnel into special beneficiary IRAs, one for each sibling, or into a single IRA that is for the benefit of more than one sibling. Distribution rules vary depending on the nature of the beneficiary.

Why Split an Inherited IRA?

Splitting an IRA among heirs is often the best choice for parents so that there is no dissension or in-fighting among siblings about the inheritance. As benefactors are the ones who select their own beneficiaries, they are the only ones who can “order” an IRA to be split among siblings. In fact, beneficiary designations on IRA even trump probate hearings — IRA assets pass outside any probate hearings or determinations, transferring in accordance with the beneficiary designation on the account.

The challenge of inheriting an IRA and splitting it among siblings doesn’t usually come at the point of transfer. Rather, it’s when the assets are distributed that some problems can arise.

IRS Rules for Splitting Inherited IRAs

The only “rule” that applies to splitting an inherited IRA is that the assets must be distributed in accordance with the decedent’s stated wishes on the actual account. However, there are quite extensive rules when it comes to the minimum distributions that are required of inherited IRAs, including among siblings. These rules were updated in 2020, so if you had made plans for an inherited IRA more than a few years ago, they may need a refresh.

According to the IRS, there are three types of non-spouse beneficiary options: eligible designated beneficiaries, designated beneficiaries and beneficiaries that are not individuals, such as a trust.

Eligible Designated Beneficiaries

An “eligible designated beneficiary” has at least one of the following three characteristics:

• They are the spouse or minor child of a decedent
• They are chronically ill or disabled, and
• They are not more than 10 years younger than the IRA owner

This scenario doesn’t generally apply to siblings splitting an inherited IRA, unless they are minors. However, if minors do inherit an IRA, they can begin taking withdrawals annually based on their own life expectancy until the time they reach age 18, at which point they must follow the rules of designated beneficiaries.

Designated Beneficiaries

As designated beneficiaries, you and your siblings will have to follow the 10-year rule when splitting the inherited IRA. What this means is the money must be withdrawn in full within 10 years.

When you inherit an IRA, you are still responsible for required minimum distributions annually. The 10-year mandate to completely empty the account is on top of this RMD requirement. This means that while you can take out as much as you would like in any given year, you must at least take out a minimum amount based on IRS life expectancy tables. In other words, you can’t keep all of the money in the inherited IRA and then take it all out at the last minute in the 10th year.

How To Split an Inherited IRA Between Siblings

The actual process of splitting an inherited IRA is fairly straightforward.

First, you’ll need documentation on the account showing who the beneficiaries are. If none exist, the IRA will have to go through probate to have local courts determine the appropriate distribution. However, most IRA companies and brokerage firms these days require account holders to designate beneficiaries at the time they open the account, so this is the likely path for both.

Next, you and your siblings will have to set up individual beneficiary IRAs so that you can receive the split proceeds of the original account. Money will be distributed in accordance with the beneficiary designations on the original account or the instructions of the probate court.

If you are splitting an inherited IRA, the transfers to individual beneficiary IRAs must occur no later than Dec. 31 of the year in which the IRA is inherited.

Tax Implications of Splitting an Inherited IRA

There are no tax implications to inheriting an IRA, as long as the assets are housed in a beneficiary IRA. This is true whether the beneficiaries use a single inherited IRA or if they split it into their own individual beneficiary IRAs. However, there are scenarios in which an inherited IRA can result in relatively severe tax consequences.

One is if you fail to take your required minimum distribution from the inherited IRA every year. This triggers a stiff 25% penalty of the amount that you should have withdrawn. For example, if you are required to take $5,000 out of your inherited IRA every year and fail to do so, you’re facing a penalty of $1,250 per year. While that may seem onerous, it’s actually a reduction from the 50% excise tax that was in place before 2023. Note that if you do make this mistake and correct it within two years, however, the penalty drops to 10%.

However, if you fail to empty your inherited IRA within the 10-year period, that 50% penalty still applies to whatever balance remains in the account. Although this rule is currently suspended until 2025 during a “transition period,” it will ultimately mean that if you leave $10,000 in an inherited IRA after 10 years, you’ll owe a penalty tax of a whopping $5,000.

Best Tip for Managing an Inherited IRA

The bottom line is that you’ll want to work with a financial and/or tax advisor if you’re planning to split an inherited IRA with your siblings. As the ramifications for missing deadlines or otherwise failing to follow the correct procedure can be severe, it’s best to enlist the aid of a professional, particularly considering that the process of inheriting an IRA can also have a huge emotional component.

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