An IRA, or Individual Retirement Account, is a tax-deferred retirement savings account. Like most bank accounts, an IRA allows you to designate a beneficiary or beneficiaries who will inherit the account after your death. This enables you to pass an inherited IRA to your heirs outside of probate.
If you and your siblings have jointly inherited a parent’s IRA, you cannot simply assume ownership of the IRA or roll the inherited balance into your own IRA. Rather, you must transfer the balance to a specific type of IRA known as an Inherited IRA. You can either transfer the balance into a single jointly-owned Inherited IRA or split the funds into separate inherited IRAs within a year of your parent’s death.
Can an IRA Be Split Between Beneficiaries?
Yes, an IRA can be split between beneficiaries within the first year of the original account owner’s death. There aren’t many advantages to splitting an account in some situations, but in others, it can create substantial tax benefits. It all depends on who the beneficiaries are.
Under the SECURE Act, which was enacted on January 1, 2020, there are different rules for “Eligible Designated Beneficiaries” than other beneficiaries.
Eligible designated beneficiaries include:
- The account owner’s spouse.
- The account owner’s minor child.
- A disabled or chronically ill person.
- Any other person who is not more than 10 years younger than the account owner.
Eligible designated beneficiaries receive certain advantages over other types of beneficiaries. For instance, while non-eligible beneficiaries are required to deplete their IRAs within 10 years, eligible beneficiaries can choose to receive Required Minimum Distributions (RMDs) for their lifetime (or in the case of a minor child, until they become an adult). This delays and limits the taxes that must be paid on the account since all withdrawals from a traditional IRA are subject to income taxes.
Additionally, spouses can choose to assume ownership of the original IRA or roll the balance over into their own IRA instead of transferring the funds into an Inherited IRA. The advantage of these options is that non-inherited IRAs don’t require the owner to take RMDs until they turn 72.
With these benefits in mind, spouses should almost always split any IRAs that they jointly inherit. Similarly, if a non-spouse eligible designated beneficiary and a non-eligible designated beneficiary jointly inherit an IRA, splitting the funds into separate Inherited IRAs will likely be advantageous.
However, if two or more adult children jointly inherit an IRA, the benefits of splitting the accounts will be limited since the account must be depleted within 10 years, and no RMDs are required.
What is the 5 Year And 10 Year Distribution Rule for IRAs?
Before the SECURE Act went into effect, every designated beneficiary had two options for how they could receive funds from an Inherited IRA:
- Deplete the account within 5 years.
- Receive RMDs for their lifetime.
If joint beneficiaries did not choose to follow the 5-year rule, it was almost always beneficial to split inherited IRAs into separate accounts. This is because RMDs are calculated by the account owner’s age, with larger distributions being required as the account owner gets older. If an IRA is jointly-owned, the oldest account owner’s age is used to calculate RMDs, so by splitting the accounts, more of the younger account owners’ money could stay invested.
However, the SECURE Act changed this. Under the current law, all non-eligible designated beneficiaries must follow the 10-year rule. This means that the beneficiaries must withdraw (and pay taxes on) all of the funds in the Inherited IRA within 10 years. While minor children are considered eligible designated beneficiaries, they are also subject to the 10-year rule once they turn 18.
Since non-eligible beneficiaries cannot choose to take RMDs over their lifetime, it is not as advantageous to split the funds into separate Inherited IRAs when adult siblings jointly inherit an IRA under the 10-year rule. However, you can still choose to do so within the first year of your parent’s death if you prefer.
Can I Contest the Distributions of an IRA?
In some situations, you may be able to contest the beneficiary designation of an IRA.
Some common reasons you can challenge a designation include:
- Lack of mental capacity.
- Undue influence, duress, forgery or fraud.
- Community property laws.
- Issues with the designation form.
- Attempted but failed designations.
- Disqualification of a beneficiary.
If you believe that a loved one’s IRA beneficiary designation was invalid, you should discuss your concerns with a reputable probate litigation attorney as soon as possible. An experienced lawyer can identify if there are legal grounds to challenge the designation and advise you about your options.
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About RMO, LLP
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