Inherited IRA With Siblings: Cash Out or Split It First?
Splitting an inherited IRA three ways isn't as simple as writing checks. Here's what executors need to know before touching that money.
You're the executor, two siblings are co-beneficiaries, and there's an inherited IRA sitting there looking like easy money. Before anyone touches a dime, pump the brakes — the IRS has very specific rules about how inherited IRAs must be handled, and a wrong move triggers taxes you absolutely don't want.
The short answer to whether you can just cash it out: technically yes, but you'll hand a chunk straight to the IRS. A lump-sum distribution from an inherited IRA is fully taxable as ordinary income in the year you take it. Split that among three siblings in a high-income year and you could each jump a bracket or two. Painful and avoidable.
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The smarter play — and the one most estate attorneys will tell you — is to split the inherited IRA into three separate inherited IRA accounts before any distributions are made. Each sibling then becomes the direct beneficiary of their own account. This matters because the 10-year rule (thanks to the SECURE Act) applies individually, giving each person flexibility to draw down on their own schedule and tax situation rather than being locked into someone else's timeline.
As executor, your job is to work with the custodial firm to execute what's called a "trustee-to-trustee transfer" into three separate inherited IRAs — one per beneficiary. Most major brokerages handle this regularly. You don't get to roll it into your own IRA (that's only for surviving spouses), and you can't treat it like a standard estate asset to be liquidated at will. The account type matters, and the rules are strict.
Bottom line: don't cash it out just because it's easy. Set up the three inherited IRAs, let each sibling manage their own 10-year drawdown strategy, and consult a tax advisor about the timing of distributions. The difference in after-tax dollars can be significant. Continue reading at MarketWatch.com
