When multiple siblings inherit an IRA together, one of the first questions they ask is whether they can simply liquidate the account and split the proceeds immediately.
The short answer is yes, beneficiaries can cash out an inherited IRA in a lump sum, but the financial consequences of doing so can be significant and long-lasting.
Any taxable portion of the IRA distribution will be subject to ordinary income taxes in the year the withdrawal is made, which can create a serious tax burden.
Taking a full lump-sum distribution in a single calendar year can push all beneficiaries into a higher tax bracket, potentially costing the family thousands of dollars unnecessarily.
Roth inherited IRAs are generally tax-free upon withdrawal, provided the original account owner satisfied the five-year holding rule before passing away.
Beyond the immediate tax hit, cashing out early also means forfeiting the potential for continued tax-deferred growth on the remaining balance inside the account.
The SECURE Act, which took effect on January 1, 2020, introduced a 10-year rule requiring most non-spouse beneficiaries to fully empty an inherited IRA within a decade of the original owner’s death.
Exceptions to the 10-year rule exist for surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries who are close in age to the original account holder.
Following final IRS regulations issued after July 2024, non-spouse beneficiaries must also take annual required minimum distributions during years one through nine if the original owner had already reached their required beginning date.
Siblings who inherit an IRA together have several paths forward, including splitting the account into separate inherited IRAs, which can give each beneficiary more individual control over their distributions.
Transferring the funds into an inherited IRA, rather than cashing out immediately, allows each sibling to manage their own withdrawal timeline and potentially reduce their annual tax exposure.
Financial and tax advisors generally recommend consulting a professional before making any decisions about inherited retirement accounts, given the complexity of the rules involved.
The executor of an estate plays an important coordination role, but beneficiaries themselves are ultimately responsible for understanding and complying with IRS withdrawal requirements tied to inherited IRAs.
