When a parent or relative dies and leaves behind an individual retirement account, the instinct among heirs is often to divide the assets quickly and move on. But as a MarketWatch report highlights, that impulse can trigger a significant and avoidable tax burden — one that catches many families by surprise. The case in question involves three adult siblings who jointly inherited an IRA and are now asking whether they can simply cash it out. The short answer is yes, but the financial consequences of doing so poorly deserve serious consideration. For readers tracking how Fed rate hikes are reshaping the value of interest-bearing retirement accounts, the timing of distributions matters more than ever.
The executor of the estate, one of the three siblings, is navigating a set of rules that were substantially overhauled by the SECURE Act of 2019 and further refined by the SECURE 2.0 Act, which took effect in stages through 2024. Under current law, most non-spouse beneficiaries who inherit an IRA from someone who died after December 31, 2019, are subject to the so-called 10-year rule. This requires the entire account balance to be withdrawn within 10 years of the original account holder’s death, with no mandatory annual minimum distributions in most cases — though that nuance depends on whether the deceased had already begun taking required minimum distributions of their own.
Splitting an IRA Among Multiple Beneficiaries
The mechanics of dividing an inherited IRA among multiple heirs add another layer of complexity. Each sibling should ideally establish a separate inherited IRA in their own name, a process that must typically be completed within one year of the original account holder’s death. If the account is not properly split, all beneficiaries may be subject to the distribution timeline of the oldest sibling, which could compress the window available for tax planning. Financial advisers generally recommend working with the IRA custodian directly to initiate what is known as a beneficial interest transfer rather than a cash withdrawal.
Once separate accounts are established, each sibling can manage their own withdrawal strategy within the 10-year framework. A lump-sum distribution — taking everything at once — is technically permissible, but it carries the steepest tax cost. Because inherited IRA withdrawals are treated as ordinary income, a single large distribution could push a beneficiary into the 32 percent or even 37 percent federal income tax bracket, depending on their other earnings. Spreading withdrawals across several years, ideally calibrated to years when the beneficiary’s overall income is lower, can reduce the effective tax rate substantially.
The Real Cost of Cashing Out Immediately
To illustrate the stakes: if the inherited IRA holds $300,000 and is divided equally among three siblings, each share amounts to $100,000. A sibling earning $80,000 annually who takes the full $100,000 in a single tax year would see their taxable income jump to $180,000 — well into the 24 percent federal bracket, with state taxes potentially adding another 5 to 10 percent depending on residency. By contrast, withdrawing $10,000 per year over the 10-year period, assuming income stays relatively stable, could keep the beneficiary within a lower bracket and preserve considerably more of the inheritance.
There is also the question of investment growth during the drawdown period. Money left inside an inherited IRA continues to compound tax-deferred, meaning that a beneficiary who resists the urge to cash out immediately may see the account grow meaningfully before the 10-year deadline arrives. Given current interest rate conditions, fixed-income holdings within an IRA can yield between 4 and 5 percent annually, adding further incentive to delay unnecessary distributions. Estate planning attorneys and certified financial planners consistently advise beneficiaries to model multiple distribution scenarios before making any withdrawals, particularly when the account is large enough to materially affect annual tax liability. In short, the executor and the two siblings can cash out — but the question of when and how much determines whether they keep the lion’s share of what they inherited or hand a sizable portion to the Internal Revenue Service ahead of schedule.