Dividing an Inherited IRA Before Year End Can Improve Tax Results for Each Beneficiary

Tuesday Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

December 31 is an important deadline for individuals who inherited an IRA from an IRA owner who died in 2009.  Where there are multiple beneficiaries for the IRA, splitting up the account into several accounts can yield important tax and other benefits for each beneficiary.

When an inherited IRA has several beneficiaries and is left in one account, the required minimum annual distributions are based on the age of the oldest beneficiary (shortest life expectancy) rather than the life expectancy of each beneficiary. This can be a disadvantage for younger beneficiaries by making them withdraw from the IRA in a shorter period of time than would be required based on their own age.

In addition, having the funds of all beneficiaries in one account forces them to utilize the same investment strategy.

These issues can be overcome by splitting the IRA into separate sub-accounts for each beneficiary.  Thus, the annual required distribution will be minimized (based on each individual beneficiary’s life expectancy), allowing each to employ their own individual investment strategy.

However, splitting the IRA into sub-accounts for each beneficiary must be accomplished by December 31 of the year following the death of the IRA owner.  Thus, for IRA owners that passed away in 2009, the deadline to split the IRA into sub-accounts is December 31, 2010.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.