By Ian Berger, JD
It’s common for IRA owners to leave their assets to multiple beneficiaries – for example, their children. Before the SECURE Act, it usually made sense to split the IRA into separate accounts either before or after death. That’s because beneficiaries could stretch payment of their shares over their life expectancy. But, if there were multiple beneficiaries and the account was not split, each beneficiary was required to use the life expectancy of the oldest beneficiary – the one with the shortest life expectancy. Splitting accounts allowed each beneficiary to use her own life expectancy.
Under the SECURE Act, most non-spouse beneficiaries must use the 10-year payout rule, which requires the entire IRA to be emptied by December 31 of the tenth year following the owner’s death. No annual distributions are required. Life expectancy is no longer used to calculate payouts for beneficiaries subject to the 10-year rule.
So, does this mean that splitting IRAs is no longer a worthwhile strategy? Not at all. Here are several good reasons why it still makes sense to create separate accounts:
When a spouse is co-beneficiary. Surviving spouses can take advantage of special IRA distribution rules that no other beneficiaries can use. For example, a surviving spouse can roll over inherited IRAs to her own IRA. However, those special rules are available only if the spouse is a sole IRA beneficiary. So, if a spouse is an IRA co-beneficiary, look to create a separate account for her to make sure she can use the special payout rules.
When an eligible designated beneficiary is co-beneficiary. Under the SECURE Act, certain individuals, called eligible designated beneficiaries (“EDBs”), can still use the stretch. These are: surviving spouses; minor children of the account owner; disabled individuals; chronically ill individuals; and individuals no more than 10 years younger than the owner. But, if one beneficiary is an EDB and the others are not (for example, one beneficiary is a minor child and one is an adult child), the EDB can only use the stretch if a separate account has been established for the EDB.
When a co-beneficiary is a non-living beneficiary. Sometimes, an IRA owner will leave part of the IRA to a charity (or another non-living beneficiary) and the remainder to one or more individuals. Non-living beneficiaries must use the least favorable IRA distribution rules (which could result in a payout period of less than 10 years). So, unless the IRA is timely split, the individual co-beneficiaries will also be stuck with those restrictive payout rules.
Practical reasons. There are also practical reasons why splitting IRAs while still alive is wise. It allows the owner to invest each account in a way that is best suited for each beneficiary. And, following the owner’s death, each beneficiary is guaranteed to have the freedom to decide whether to accelerate IRA payouts during the 10-year period or wait until the end.
Remember that if the IRA owner doesn’t split the account during his lifetime, the beneficiaries can still do it after his death. But there is a deadline for splitting: December 31 of the year after the year of the original owner’s death.