My two siblings and I inherited an IRA, and I am the executor of the estate. We want to cash it out. A reader asks whether the firm requires creating three new inherited IRAs to divide the account equally.
The answer depends on the type of IRA and the firm’s specific policies. Traditional IRAs and Roth IRAs follow different distribution rules, which affect how beneficiaries can access the funds. The custodian holding the account also has its own procedures for handling beneficiary requests.
For most non-spouse beneficiaries, the default option is to transfer the assets into an inherited IRA in each person’s name. This action allows each sibling to manage their share separately and follow their own withdrawal timeline. Creating separate accounts is often the cleanest way to split the inheritance.
Cash distributions are generally permitted, but they trigger tax consequences for traditional IRAs. The entire amount withdrawn becomes taxable income in the year it is taken. Roth IRA distributions, in contrast, may be tax-free if the account meets the five-year holding requirement.
The executor does not carry a legal obligation to create three accounts. The key constraint comes from the financial firm’s rules. Some custodians require separate inherited IRAs before processing a full cash-out, while others allow a direct disbursement to multiple beneficiaries.
Inherited IRA beneficiaries must also follow the 10-year rule, which mandates that the account be emptied by the end of the tenth year following the original owner’s death. This rule applies to both traditional and Roth IRAs for most non-eligible designated beneficiaries.
Before making a decision, the reader should consult a tax professional to assess the immediate tax burden. Withdrawing the entire balance in one year could push the siblings into a higher tax bracket. A staggered distribution plan could reduce that financial hit.
The reader should contact the IRA custodian directly to ask about its beneficiary payout options. If the firm insists on separate accounts, creating them is a standard and straightforward process. The siblings can then decide collectively or individually on the timing of their withdrawals.
