Inherited IRA With Siblings: Do You Need Separate Accounts?
A reader serving as executor asks whether three siblings must open individual inherited IRAs or can simply cash out a jointly inherited account.
When a parent or relative dies and leaves an IRA to multiple beneficiaries, the logistics can catch heirs off guard — especially the sibling tasked with acting as executor. One reader posed a pointed question to MarketWatch: with two siblings and themselves listed as equal beneficiaries on an inherited IRA, is it legally required to split the account into three separate inherited IRAs, or can the group simply cash it out and move on?
The short answer, according to financial and tax guidance, is that the rules around inherited IRAs are more nuanced than a straightforward cash-out. The IRS generally requires non-spouse beneficiaries to take distributions, but how and when those distributions happen — and whether the account must be formally divided — depends on the custodian's policies, the type of IRA inherited, and the tax consequences each beneficiary is willing to accept.
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Cashing out an inherited IRA in a lump sum is technically allowed, but it comes with a significant tax bite: the full withdrawal is typically treated as ordinary income in the year it is taken. For three siblings splitting an account, that could push each individual into a higher tax bracket depending on the size of the inheritance and their existing income. Spreading distributions over time — particularly under the 10-year rule that now governs most non-spouse beneficiaries under the SECURE Act — can soften that blow.
Creating separate inherited IRA accounts for each beneficiary gives each sibling independent control over their distribution timeline and investment choices, potentially optimizing their individual tax situations. Most financial institutions will require this separation before allowing each beneficiary to manage their own share, and the process typically must be initiated within a specific window after the original account holder's death.
For anyone navigating this situation, consulting a tax professional or estate attorney before making any moves is strongly advised — the wrong decision could mean an unnecessarily large tax bill. Continue reading at MarketWatch.com
