Can I Split My Traditional IRA Into Two Accounts?

Can I split my traditional IRA into two accounts

Traditional IRAs provide tax-deferred growth potential. At age 70 1/2, however, you must begin taking required minimum distributions (RMDs).

If your IRA will be distributed among multiple beneficiaries, having multiple accounts could make sense in terms of family tension and headache avoidance; however, managing multiple IRA accounts may prove challenging.

Taxes

Traditional IRAs allow you to set aside money for retirement throughout your lifetime. Contributing either pre- or after-tax dollars allows investments to grow tax-deferred; taxes will only be due on withdrawals in retirement.

An Individual Retirement Account, or IRA, does not require mandatory minimum distributions until April 1 of the year following your 70 1/2 birthday. Any withdrawal prior to that age could incur a 10% penalty fee.

Traditional IRAs are one of several different types of individual retirement accounts (IRAs), such as Roth IRAs, SIMPLE IRAs and SEP IRAs. You may open multiple IRAs as long as your annual contribution limit doesn’t go over. But having multiple IRAs adds an additional level of complexity to your finances that makes managing each account individually more difficult – not to mention possible additional taxes due to not following transfer incident rules properly – you should consult with an adviser regarding this situation if applicable.

Investments

IRAs allow you to invest in a wide array of investments. Many investors use mutual and exchange-traded funds (ETFs) as investment vehicles for creating a diversified portfolio; such vehicles may provide greater diversification and higher long-term returns than individual stocks, which tend to be more volatile.

If you own multiple IRA accounts, consolidating them may make sense. Fewer accounts mean less statements to track and less companies to notify should beneficiaries move or change. Plus, lower fees might make sense too!

If you decide to consolidate, a new IRA account can be opened at either your current brokerage or one different from before. Next you will need to decide who will inherit your IRA assets upon your death and what percentage they’ll be receiving; once this decision has been made, their full names, dates of birth, addresses and Social Security numbers must be filed so your beneficiary form can be completed correctly; you should give this information when opening or updating an account with them or later on.

Withdrawals

IRAs provide tax advantages by deducting contributions from your taxes and deferring investment earnings tax until their withdrawal in retirement, in contrast to 401(k)s from employers and SEP/SIMPLE IRAs for self-employed individuals, which require taxes be withheld immediately on withdrawal.

Once you reach age 70 1/2, traditional IRA owners are required to start taking RMDs from them or incurring stiff penalties from the IRS. To circumvent this penalty, one option would be splitting up your IRA into multiple accounts for different beneficiaries either during life or upon your passing.

Dividing an IRA into multiple accounts enables each beneficiary to spread withdrawals out over their life expectancy, rather than liquidating all at once and receiving one large lump sum payment. This benefit can be especially important when the beneficiaries are younger than the IRA owner or spouse. In some instances, it may also be possible to transfer it onto new owners; however this usually creates administrative issues and should be avoided whenever possible.

Beneficiaries

At times, beneficiaries of an IRA may prefer that assets not be distributed as intended – perhaps because one is minor or has special needs; or due to losing access to government benefits by owning them in their own name.

One option is utilizing a trust, such as a QTIP or charitable trust, but this must be coordinated carefully with all beneficiaries.

SmartAsset’s free tool makes it simple and cost-free to find an IRA asset distribution plan suitable for multiple beneficiaries, matching you with advisors in your local area who offer free consultation services so you can interview multiple advisors without incurring fees before selecting your ideal choice. Get searching today.


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