Can I Split My Traditional IRA Into Two Accounts?
Traditional IRAs offer tax benefits to savers who want an upfront tax deduction and lower their taxable income in retirement, as well as being an excellent choice for rolling over funds from old workplace retirement plans.
At your death, RMDs must begin immediately. Therefore, it may make sense to split your IRA into several separate inherited IRA accounts for beneficiaries.
How to Split Your IRA
Traditional individual retirement accounts (IRAs) are an increasingly popular means of saving for retirement, offering individuals of all income levels the chance to save tax-deferred.
Although IRAs offer significant tax advantages, there are certain restrictions and required minimum distributions (RMDs) must be taken each year after age 72 or 73 to offset any tax liabilities generated by their assets; otherwise individuals would create “eternal IRAs” that grow without ever producing any revenue for the federal government.
Some IRA owners may choose to establish multiple accounts and allocate specific investments across them, which can be helpful when beneficiaries have distinct investment preferences or when looking for low-cost robo-advisor solutions for stock picking. Unfortunately, multiple accounts can pose challenges when managing distributions or correctly calculating RMDs; one possible solution could be merging them through a rollover.
Taxes
By splitting your IRA, it allows you to employ various long-term investment strategies. For instance, one account could use a low-cost robo-advisor while the other lets you explore stock picking.
Another advantage of splitting your IRA is avoiding an expensive tax bill. Because IRA withdrawals are pre-tax investments, any withdrawals must be reported as ordinary income unless you’re aged 59 1/2 or over; otherwise they incur an early distribution penalty of 10%.
Beneficiaries of Individual Retirement Accounts (IRAs) have the option of splitting accounts after their owner passes away, but splitting while still alive makes more sense. By doing this, beneficiaries will be able to withdraw funds at their own pace rather than being forced out all at once and may choose whether traditional or Roth accounts best meet their preferences. To make this process easy and successful for yourself during life, SmartAsset’s free tool matches you up with advisors in your area so you can interview them without incurring costs before deciding whether or not hire them.
Rollovers
Rollovers are the process of moving retirement funds between accounts. They may be done either directly or indirectly; the IRS only permits one indirect rollover every 12 months or less without incurring penalties.
Under direct rollover, funds from your old account are transferred directly into your new one without incurring any tax consequences. But with indirect rollover, your plan administrator liquidates your holdings and sends you a check withholding 20% for taxes; after which time you must deposit it within 60 days or risk incurring a taxable distribution.
Financial experts may advise transferring assets from a 401(k) into a traditional IRA so you can maintain the same tax treatment and potentially benefit in future tax bracket decreases.
Beneficiaries
If you are the spouse, child or other Eligible Designated Beneficiary (EDB) of an IRA account owner who passed away prior to April 1 of the year you turn 72, withdrawals could be stretched over your own life expectancy. But this option only exists if he or she died prior to April 1.
IRA accounts owned by those aged 70 years or over that have passed must be distributed within 10 years after death; with some exceptions such as being the surviving spouse, disabled or chronically ill person, underage child or less than 10 years younger than original account holder.
As soon as you inherit an IRA, it’s crucial that you understand its rules and options for dispersing its funds. Consult a tax or financial professional in order to make the best choice suited for your unique circumstances.
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