Can Siblings Cash Out an Inherited IRA? Rules for Executors

Understanding the Role of the Executor

The person named as executor in a will is responsible for gathering the deceased’s assets, paying debts, and ensuring that each beneficiary receives what is legally due. When the asset in question is an Individual Retirement Account (IRA), the executor’s duties intersect with complex tax rules that differ from other estate items. The executor does not automatically become the owner of the IRA; instead, the account passes directly to the named beneficiaries, which may include multiple siblings.

What Happens to an IRA After the Owner Dies?

Unlike a traditional brokerage account, an IRA is not subject to probate if a valid beneficiary designation exists. The account bypasses the estate and transfers directly to the individuals listed on the beneficiary form. This direct transfer preserves the tax‑advantaged status of the account, but it also triggers specific distribution requirements that each beneficiary must follow.

Beneficiary Designations vs. Probate

If the deceased did not update the beneficiary form, the default may be the spouse, children, or the estate. In the case of three adult children, the IRA would be split equally among them, unless the form specifies otherwise. The executor’s job is to confirm the designations, obtain the death certificate, and notify the IRA custodian of the change in ownership.

Distribution Options for Multiple Beneficiaries

When more than one person inherits an IRA, each beneficiary can choose how to receive the funds, but the choices are limited by the Internal Revenue Service (IRS) rules that were updated in 2020 under the SECURE Act. The two main pathways are:

• Transfer the inherited balance into a separate inherited IRA in each beneficiary’s name.
• Take a lump‑sum distribution within five years of the original owner’s death, if the account is not a designated Roth IRA.

The decision hinges on tax impact, cash‑flow needs, and long‑term financial goals.

Creating Separate Inherited IRAs

Each sibling must open an inherited IRA to receive their share. The custodian will typically require a copy of the death certificate and a completed beneficiary claim form. The account is titled “Inherited IRA – [Beneficiary Name]” and cannot be rolled over into the beneficiary’s own retirement accounts. The purpose of separate accounts is to track each person’s required minimum distribution (RMD) schedule, which is calculated based on the beneficiary’s life expectancy.

Required Minimum Distributions (RMDs)

Under the SECURE Act, most non‑spouse beneficiaries must withdraw the entire balance by the end of the tenth year after the original owner’s death. However, the IRS still requires an annual RMD calculation for each year before the final distribution, unless the beneficiary elects the five‑year rule. The IRS required minimum distributions page provides the exact tables and formulas.

If a beneficiary fails to take the RMD, the amount not withdrawn is subject to a 25 percent excise tax, which may increase to 50 percent for certain high‑income individuals.

Tax Consequences of Cashing Out

Taking a lump‑sum distribution triggers ordinary income tax on the entire amount in the year of withdrawal. For a traditional IRA, the tax liability can push the beneficiary into a higher marginal tax bracket, resulting in a sizable bill at tax time. In addition, if the beneficiary is under age 59½, the early‑withdrawal penalty of 10 percent generally applies, unless an exception such as “disability” or “substantially equal periodic payments” is met.

Income Tax vs. Early Withdrawal Penalty

Consider a scenario where the inherited IRA holds $150,000. If a sibling cashes out the full amount in a single year, the IRS treats the distribution as ordinary income. Assuming a marginal tax rate of 24 percent, the tax alone would be $36,000. Adding a 10 percent penalty raises the total cost to $51,000. By contrast, spreading withdrawals over the ten‑year period keeps the taxable amount lower each year and may avoid the penalty entirely if the beneficiary follows the RMD schedule.

Practical Steps for the Executor and Siblings

To navigate the process without costly mistakes, follow these steps:

1. Obtain the original IRA account statements and the death certificate.
2. Contact the IRA custodian to confirm the list of beneficiaries and request the required claim forms.
3. Advise each sibling to open an inherited IRA in their own name. The custodian will handle the transfer of the appropriate share.
4. Calculate the first year’s RMD for each beneficiary using the IRS Uniform Lifetime Table, unless the five‑year rule is elected.
5. File the appropriate tax forms (Form 1041 for the estate, Form 5329 for missed RMDs) and advise beneficiaries to report distributions on their individual tax returns.
6. Consider consulting a tax professional or estate attorney to evaluate whether a lump‑sum payout or a stretched distribution better aligns with each sibling’s financial situation.

It is also wise to review the U.S. Treasury’s guidance on inherited IRAs for additional details on eligibility and special cases, such as beneficiaries who are minors or disabled.

Finally, keep thorough records of all communications, forms, and distribution calculations. The IRS may request documentation during an audit, and having a clear paper trail protects both the executor and the beneficiaries.

Special Situations to Keep in Mind

Not all inherited IRAs are treated the same. A Roth IRA, for example, allows tax‑free withdrawals of contributions, but earnings are still subject to the ten‑year rule. If a sibling is a minor, the account must be held in a custodial “inherited IRA” until the child reaches the age of majority.

Spousal beneficiaries have the most flexibility. They can treat the inherited IRA as their own, roll it over, or remain a non‑spouse beneficiary. Since the scenario involves three siblings, the spousal option does not apply, but it is useful to understand the contrast.

For further clarification on the tax treatment of inherited retirement accounts, the SEC’s investor guide offers a concise overview.