Inheriting an IRA can be a blessing, but ensuring it is appropriately divided between beneficiaries also comes with challenges.

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Mike Bernard, CFP® offers advisory services through KFG Wealth Management, LLC dba Korhorn Financial Group. This information is for general financial education and is not intended to provide specific investment advice or recommendations. All investing and investment strategies involve risk, including the potential loss of principal. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results….(read more)

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Dividing an Inherited IRA Between Two Beneficiaries

Inheriting an Individual retirement account (IRA) can be a significant financial windfall, but it also comes with its fair share of complexities. Among the many challenges that beneficiaries may face, deciding how to divide an inherited IRA between multiple beneficiaries can be quite a headache. This article aims to shed light on this specific issue and provide guidance on how to navigate this process efficiently and fairly.

When an IRA is passed down to multiple beneficiaries, it is crucial to understand the options available for distribution. The first step is to determine whether the inherited IRA is a traditional or Roth IRA, as each has different tax implications.

For a traditional IRA, the beneficiaries typically have two options: taking a lump-sum distribution or setting up separate inherited IRAs. Choosing a lump-sum distribution may seem tempting, as it provides an immediate cash infusion. However, this option often comes with significant tax consequences. The entire amount withdrawn from the traditional IRA will be subject to income tax, potentially pushing beneficiaries into a higher tax bracket. Additionally, withdrawing a large sum may also have adverse effects on other financial aspects, such as eligibility for certain tax credits and deductions.

Setting up separate inherited IRAs is generally a more tax-efficient option. Each beneficiary can establish their own account within their name, allowing them to stretch the distributions over their own life expectancy. This approach offers the advantage of deferring taxes on the required minimum distributions (RMDs) and potentially maximizing the IRA’s growth over time. Furthermore, beneficiaries can choose their preferred investments and distribution amounts, providing greater flexibility and control over their inherited assets.

When dividing an inherited IRA between two beneficiaries, it is essential to determine their respective percentage interests. This division can be done in several ways, such as by specifying the exact percentage in the original IRA documentation or, alternatively, equally splitting the account. The latter option is common when there is no specific guidance from the original IRA owner. However, before settling on a distribution method, beneficiaries should consult a financial advisor or tax professional to ensure compliance with IRS regulations and minimize any potential consequences.

Moreover, it is crucial to note that the age difference between beneficiaries plays a significant role in calculating RMDs. The age of the oldest beneficiary is used to determine the distribution amounts. Consequently, if one beneficiary is significantly older, the distribution amounts will be higher, impacting the potential growth of the inherited IRA.

To simplify the process and minimize complications, it is advisable to work closely with a financial advisor who has experience in managing inherited IRAs and understands the complexities associated with dividing assets between beneficiaries. They can provide personalized advice based on individual circumstances, helping to optimize the distribution strategy and minimize any unnecessary tax burdens.

In conclusion, dividing an inherited IRA between two beneficiaries requires careful consideration and an understanding of the available options. Setting up separate inherited IRAs is generally a more tax-efficient approach, providing beneficiaries with the flexibility to stretch distributions over their own life expectancies. Consulting a financial advisor is highly recommended to ensure compliance with IRS regulations and make informed decisions.