Should You Use Separate IRAs for Beneficiaries?

Executive Summary: For many families, separate IRAs for beneficiaries make taxes, withdrawals, and investments easier to manage. You gain independent control but accept extra paperwork, strict titling, and hard deadlines. This guide explains what separate accounts are, when they help, when a pooled approach is fine, and how to split the account correctly.

What “Separate IRAs for Beneficiaries” Actually Means

When an IRA owner dies, the account passes to the named beneficiaries. The heirs can keep everything in one inherited IRA or divide the funds into separate IRAs for beneficiaries, one account per share. The split happens after death and before key deadlines so each person can manage investments and withdrawals on their own.

Think of “separate accounts” as an administrative status. Each heir’s portion moves into an account titled to reference the decedent and the beneficiary (for example: “John Smith, deceased 5/1/2025, IRA FBO Jane Smith, Beneficiary”). Once the split is complete, each beneficiary sets an allocation and a withdrawal plan without affecting anyone else.

Why Separate IRAs for Beneficiaries Can Be Smart

Choosing separate IRAs for beneficiaries often delivers practical advantages:

• Personalized withdrawal timing: Each person can coordinate distributions with bonuses, capital gains, or other income.
• Custom investment mix: One heir can stay conservative while another pursues growth.
• Cleaner tax planning: Traditional IRA withdrawals are taxable; separate accounts let each beneficiary manage brackets and deductions.
• Administrative peace: Fewer arguments about risk, rebalancing, or timing.
• Special-rule clarity: Eligible beneficiaries may have different options; separate accounts keep those paths distinct.

Rules That Shape Your Decision

The 10-Year Rule, Plainly Explained

Most non-spouse non-eligible designated beneficiaries must empty an inherited IRA by December 31 of the 10th year after the original owner’s death. Under final IRS regulations, if the decedent died on or after their required beginning date (RBD), annual RMDs are also due in years 1–9. If the decedent died before the RBD, no annual RMDs are required during years 1–9. Either way, the account must be fully distributed by year 10. Separate IRAs for beneficiaries don’t erase the deadline; they simply let each person manage it independently.

Who Qualifies for Extended Payouts

Eligible Designated Beneficiaries (EDBs) can use life-expectancy payouts instead of the 10-year rule. Common EDBs include a surviving spouse, a beneficiary who is disabled or chronically ill, a minor child of the decedent (until age 21, after which the 10-year clock starts), and someone not more than ten years younger than the decedent. If one heir qualifies for EDB treatment and others do not, separate IRAs for beneficiaries preserve each person’s distinct timeline.

The Separate-Accounts Deadline and Mechanics

To receive full “separate account” treatment for post-death RMD calculations, beneficiaries generally must establish their own inherited IRAs by December 31 of the year following the IRA owner’s death. There’s also a beneficiary determination date (September 30 of that same year) used to finalize who counts as a designated beneficiary after any disclaimers or cashouts of non-designated beneficiaries. Miss the December 31 separate-account deadline and RMDs may be calculated on a pooled basis for that period, which reduces flexibility. Expect to provide a death certificate, beneficiary claim forms, and custodian-approved titling language, start early to avoid year-end bottlenecks.

Year-of-Death RMD Must Come First

If the decedent had an RMD due for the year of death that wasn’t withdrawn, beneficiaries must satisfy that remaining amount by year-end. This applies only if the decedent had reached their RBD (not for Roth IRA owners and not if death occurred before the RBD). After that, each heir follows the applicable rules, ideally within separate IRAs for beneficiaries if the split is completed on time.

Traditional vs. Roth: Different Taxes, Same Process

Traditional IRA withdrawals are taxable as ordinary income to the beneficiary. For inherited Roth IRAs, qualified withdrawals are generally tax-free; the 10-year distribution timeline can still apply to non-EDBs, but annual RMDs in years 1–9 are not required for Roth beneficiaries because Roth owners are treated as having died before their RBD. Remember the Roth 5-year rule for tax-free earnings: if the decedent’s Roth wasn’t open 5 years, a portion of earnings may be taxable until that clock is met.

Pros and Cons at a Glance

Separate Inherited IRAs vs. One Pooled Inherited IRA

Feature	Separate IRAs for Beneficiaries	Pooled Inherited IRA
Withdrawal control	Each heir chooses their own pace within the rules.	One schedule can constrain everyone.
Investment strategy	Custom risk level per beneficiary.	Compromise allocation; potential conflict.
Tax planning	Optimize brackets individually.	Group withdrawals can force suboptimal taxes.
Complexity	More accounts and paperwork early on.	Simpler setup but less flexibility later.
Special beneficiary status	Preserves unique timelines and options.	Mixed statuses complicate one plan.
Deadline sensitivity	Split must be completed by the deadline.	Fewer time-sensitive steps, fewer benefits.

Case Studies: How the Choice Plays Out

Case 1: Three Adult Children, Three Tax Brackets

An IRA of $900,000 goes to three adult children equally. One earns $75,000, another earns $180,000, and the third has variable self-employment income. In a pooled inherited IRA, evenly paced withdrawals could push the high earner into a higher bracket and force the lower earner to take funds when they aren’t needed.

With separate IRAs for beneficiaries, the lower earner can fill lower tax brackets early, the high earner can time distributions around bonuses or stock-option exercises, and the self-employed heir can withdraw more in lean quarters to reduce tax pressure. The 10-year rule still applies, but each person’s plan fits their life.

Case 2: A Spouse and an Adult Child

An IRA owner leaves 60% to a spouse and 40% to an adult child. The spouse may consider a spousal rollover to treat the assets as their own, or remain a beneficiary and use life-expectancy payouts where available. The adult child likely faces the 10-year rule and, if the decedent had reached the RBD, annual RMDs in years 1–9. Left pooled, the child’s timeline can clash with the spouse’s options.

By using separate IRAs for beneficiaries, the spouse pursues a rollover or beneficiary options on a separate track, while the child manages a distinct 10-year window. Each also selects an allocation aligned with personal goals and risk tolerance.

Case 3: A Roth IRA and Uneven Cash Needs

A $300,000 Roth IRA passes to two heirs. One plans a home renovation in three years; the other prefers compounding for a decade. In a pooled account, the renovation timeline could drive withdrawals for both.

With separate IRAs for beneficiaries, one heir withdraws in year three while the other waits until year nine or ten (without annual RMD obligations), keeping investments intact longer.

How to Set Up Separate IRAs for Beneficiaries (Step-by-Step)

Here’s a streamlined way to implement separate IRAs for beneficiaries without missing key requirements:

1. Collect documents: Obtain the death certificate, account statements, and the latest beneficiary designation.
2. Contact the custodian promptly: Request inherited IRA claim forms and the custodian’s exact titling standards.
3. Confirm ownership and percentages: Verify each heir’s share and whether any disclaimers are planned.
4. Address the year-of-death RMD (if any): If applicable and unpaid, satisfy it before year-end; not required for Roth owners and not required if the decedent died before the RBD.
5. Create separate accounts: Open an inherited IRA for each heir with correct titling referencing the decedent.
6. Transfer assets in kind or in cash: Decide whether to move positions as-is or liquidate first; confirm which assets are transferable.
7. Set the withdrawal plan: Map the 10-year window (or life-expectancy schedule for EDBs), and note if annual RMDs apply based on whether the decedent died before or after the RBD.

The steps are straightforward, but custodian processes differ. Start early, especially if multiple accounts, employer plans, or trusts are involved.

Common Pitfalls to Avoid

• Missing key dates: Remember the September 30 beneficiary determination date and the December 31 separate-accounts deadline in the year after death.
• Incorrect titling: The inherited IRA must reference both the decedent and the beneficiary correctly to avoid tax headaches.
• Commingling assets: After separation, don’t move funds between heirs or mix with your own IRA assets.
• Plan-to-IRA confusion: Non-spouse beneficiaries moving assets from a 401(k)/403(b) must use a direct trustee-to-trustee transfer to an inherited IRA; 60-day rollovers aren’t allowed.
• State tax surprises: State income tax treatment varies; plan distributions with both federal and state rules in mind.
• Status changes: A minor child’s EDB status ends at age 21; plan for the switch to the 10-year rule.

Quick Reference: Timeline and Tasks

Typical Post-Death Timeline for Inherited IRAs

Timeframe	Primary Tasks	Why It Matters
Weeks 1–4	Gather documents; notify custodian; freeze trading if required.	Opens claims process and preserves records.
Months 1–3	Confirm beneficiaries and shares; evaluate spousal rollover vs. inherited options; consider disclaimers.	Sets the right path for each heir.
By September 30 of the year after death	Finalize designated beneficiaries (post-disclaimers, payouts to non-designated beneficiaries).	Determines who “counts” for RMD rules.
Months 2–6	Establish inherited IRAs; retitle; address any year-of-death RMD.	Prevents penalties and keeps options open.
By Dec 31 of the year after death	Complete the split into separate accounts.	Preserves separate-account treatment for distributions.
Years 1–10	Execute withdrawals; rebalance; manage taxes annually (and take annual RMDs in years 1–9 if the decedent died on/after the RBD).	Maintains compliance and aligns with goals.

When Separate IRAs for Beneficiaries Make the Most Sense

• Different tax brackets: Spreading withdrawals to fit each person’s bracket is easier when accounts are separate.
• Different risk tolerance: Growth-oriented heirs can invest more aggressively without imposing volatility on others.
• Mixed beneficiary types: A spouse or other EDB can use different payout rules than non-spouse heirs.
• Uneven cash needs: One person may need funds soon; another may prefer compounding longer.
• Complex estates: Multiple custodians, trusts, or business interests benefit from clean, individualized lines.

Practical Withdrawal Strategies After the Split

Once the accounts are separate, move from theory to execution. Your distribution plan should consider taxes, cash flow, and market risk. Here are practical approaches:

• Bracket-filling: Estimate your yearly tax bracket and withdraw enough to use lower brackets without jumping higher.
• Market-aware selling: If you hold volatile assets, consider taking distributions from cash or short-duration holdings after drawdowns to avoid selling at lows.
• Front-load vs. back-load: Some prefer early withdrawals for simplicity; others let assets grow and withdraw later. Either path can work if numbers and temperament align.
• Roth last (often): If both traditional and Roth inherited IRAs exist, many families spend taxable assets first to preserve tax-free growth. Always weigh future brackets and estate goals.

Coordinate With the Bigger Estate Picture

Inherited IRAs rarely stand alone. Consider brokerage assets, real estate, life insurance, and debts. If one heir also receives assets with a step-up in basis, they may favor using those for near-term needs while keeping the inherited IRA invested. Separate IRAs for beneficiaries make these trade-offs easier without forcing a one-size-fits-all approach.

FAQs on Separate IRAs for Beneficiaries

Do we need to liquidate to split?

Not always. Many custodians can transfer positions “in kind” into each heir’s inherited IRA. Some assets may be non-transferable, so confirm capabilities before you act.

Can beneficiaries use different schedules?

Yes, after separation. Each person follows rules based on their status. Some take steady annual withdrawals; others wait and withdraw more later, as long as the overall deadline is met (and annual RMDs apply only when the decedent died on/after the RBD).

What if we disagree on investments?

That’s a strong cue to use separate IRAs for beneficiaries. After the split, each person chooses an allocation (income-oriented or growth-focused) without conflict.

How do trusts affect the decision?

Trusts can be beneficiaries if structured correctly, but their payout rules may be more restrictive. If both a trust and individuals inherit, separation can isolate different rules and simplify administration.

Should we separate a Roth IRA, too?

Often, yes. Even if qualified Roth withdrawals are tax-free, separate IRAs for beneficiaries allow individualized timing, investment control, and documentation, helpful when cash needs differ, and Roth non-EDB beneficiaries typically have no annual RMDs in years 1–9.

Conclusion: A Simple Framework for a Complex Moment

Use separate IRAs for beneficiaries when heirs have different tax situations, risk preferences, or timelines. The approach gives each person personal control, reduces conflict, and often improves after-tax outcomes. In exchange, you accept more forms and a firm deadline to complete the split.

If your family’s taxes, cash needs, or beneficiary categories differ, the case for separate IRAs for beneficiaries is strong. If everyone’s situation is nearly identical and simplicity matters most, a pooled inherited IRA can still work. Either way, get the titling right, meet the deadlines, and document the plan. Done carefully, separate IRAs for beneficiaries turn a complex inheritance into a clear, individualized strategy.

Key Takeaways

• Separate IRAs for beneficiaries provide each heir control over withdrawals, investments, and taxes.
• Complete the split by December 31 of the year after death to preserve separate-account treatment, and mind the September 30 beneficiary determination date.
• Eligible beneficiaries may qualify for different timelines; separation keeps rules clean.
• Both traditional and Roth inherited IRAs can benefit from separation; note that Roth non-EDBs typically have no annual RMDs in years 1–9, though the 10-year deadline still applies.
• A year-by-year distribution plan prevents deadline surprises and supports consistent execution.

Note: Rules can change and details depend on your situation. Consider working with a qualified tax professional or advisor before making irrevocable decisions related to separate IRAs for beneficiaries.