My Siblings And I Inherited Our Dad’s IRA, Now What?
A prospective client contact me regarding the disposition of an IRA account he and his siblings inherited from their father. They wanted to know what had to be done now that they were to receive the IRA funds.
Many people will name multiple beneficiaries to an IRA or other retirement account. They’ll do this when they want the account balance to go to more than one person, but they don’t want to incur the additional fees or paperwork by maintaining separate accounts for each beneficiary. While it makes things easier for the account holder, handling the IRA after his death can be very a complex task for the beneficiaries.
The first step is to split the IRA into separate accounts, one for each sibling named as a beneficiary. The due date for splitting an IRA is December 31 of the year following the year of the account owner’s death. In this case, because the father died in 2015, the children have until December 31, 2016, to split the IRA into separate accounts.
The December 31 deadline is important because it allows each beneficiary to “stretch” distributions from his or her separate account over their own remaining life expectancy. This can be important where there is a large age difference from the oldest to the youngest beneficiary. If the deadline is missed, money must be withdrawn from dad’s IRA based upon the life expectancy of the oldest designated beneficiary.
This split must be done by direct transfer. Non-spouse beneficiaries may not roll over a deceased account owner’s IRA. Each new “inherited” IRA account must also keep the deceased account owner’s name on the account.
Once the split is completed, each beneficiary must begin taking distributions from his or her inherited IRA account by the same December 31 account splitting deadline to take advantage of the life expectancy method of distribution. In this case, they must begin taking distributions out by December 31, 2016. The life expectancy method allows a beneficiary to maximize tax deferred growth of the balance of the IRA account over their remaining lifetime.
Seems very simple. But the rules governing IRA and other retirement account distributions are very complex. Even something as seemingly simple as splitting up an IRA or other retirement account can be done incorrectly, resulting in disastrous tax consequences.
Your situation is unique. Please do not rely on the information contained in this article as it may not apply to your situation. Before making any move with an IRA or any other type of retirement account, consult your CPA or other tax adviser, or contact me. I can help.
