I want to split my Roth IRA between several family members when I die. What’s the best way to do it?

–Dennis in Phoenix

A: Hi Dennis,

You are correct that the 10-year rule does not have to be imposed on spouses because a set of special rules apply to spouses. I don’t have room here to get into those here so I will save those special rules for another time. However, I will share that one of the spousal rules is exactly what you describe. Surviving spouses, and only surviving spouses, can take Roth IRA money into their own Roth IRA account and the funds are treated as though the inheriting spouse always owned them. The same rules apply to traditional IRAs, too.

The two most common ways to split the funds are to use separate accounts before death or split a single account after death.

You can establish as many separate accounts as you like with differing beneficiaries on each account. This requires some paperwork on your part today. When you die, each beneficiary would be responsible for processing the account for which they were named beneficiary.

There can be a few advantages to separating now. Different beneficiaries may have differing needs. For instance, if your sister is not more than 10 years younger than you, she qualifies as an Eligible Designated Beneficiary (EDB) and may be able to take minimum distributions over her life expectancy rather than having all the funds forced out by the end of the 10th year after the year you die.

Using separate accounts can also make differing portfolio positioning easier. For instance, the account for your sister could be positioned more conservatively than that of your spouse or your nephews. Further, separate accounts can make it less likely beneficiaries will learn about the details of the inherited accounts of other beneficiaries.

The most frequently cited negative to the separate account approach is it makes managing the funds a bit more cumbersome because you have multiple accounts to track. Even if you intend to manage the accounts identically, multiple accounts can be a hassle.

By contrast, the second common approach is to keep just one account now and have the beneficiaries split the assets after your death. The law allows beneficiaries to split a Roth IRA into separate Inherited Roth IRA accounts based on the beneficiary forms. Now, because the best practice is to form separate inherited accounts by Sept. 30 of the year after the year the original account owner dies, the cooperation of the beneficiaries is very helpful.

If the accounts are not separated by all the applicable deadlines, administering distributions can become a mess — and fast. The details will have to wait for a future column, but the oversimplified result is usually that the money will be forced out in the shortest amount of time. This is generally by the 10th year but if there is a nonhuman such as a charity or the decedents estate involved, it can be as short as five years.

Having the money forced out faster may not be a big problem with your Roth IRA from a tax standpoint because the distributions are likely tax-free. However, these same rules apply to traditional IRAs so failing to split in time can be costly because typically those distributions are fully taxable and the more that comes out, the higher the tax bill.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line. 

Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide but with offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.