By the time some people reach retirement age, they have accumulated a substantial nest egg consisting of 401k’s, pensions, and IRAs. They saved with the intent of having a comfortable lifestyle during their golden years. But what happens to an individual’s hard-earned assets once they pass away? Understanding what happens with retirement accounts after death can help provide peace of mind for the account holder and their loved ones.
After someone passes away, the first step is locating all of their retirement accounts and contacting the financial institutions. If the deceased named a beneficiary for their accounts, the assets will go directly to them without needing to go through probate. However, the funds will become part of the deceased’s estate if there is no beneficiary. In that event, they will need to go through probate.
Probate is the legal process that involves authenticating the deceased person’s will, if one exists, and settling their estate, which includes paying debts and distributing assets to heirs or beneficiaries.
The duration of the probate process can vary widely depending on the complexity of the estate, taking anywhere from several months to a couple of years.
The relationship between the deceased and the beneficiary can also impact what happens to the retirement accounts. A spouse is able to transfer the funds of a 401k or IRA into their own IRA. Or, they can choose to take it over. In that event, there are three options:
- It can stay in the account until the employee has turned 72
- The spouse can take distributions based on their own life expectancy
- They can follow the 10-year rule, which states the account must be emptied by the tenth year following the deceased’s death.
Non-spouse beneficiaries of an inherited IRA have different rules based on whether they are a designated beneficiary or an eligible designated beneficiary.
A designated beneficiary is a person whom the deceased named to inherit the balance of an IRA or other type of retirement account. They can be any person chosen by the account owner
On the other hand, an eligible designated beneficiary is a specific classification, such as:
- surviving spouse
- a disabled or chronically ill individual
- an individual who is not more than ten years younger than the IRA owner
- a minor child of the IRA owner
One key difference is that a designated beneficiary is required to follow the 10-year rule. Furthermore, any distribution from the account is considered taxable income.
However, eligible designated beneficiaries have different rules that allow them to stretch out distributions over their lifetime or the deceased’s, providing potential tax benefits.
Navigating the rules for inherited retirement accounts can be complex. Each person’s situation is unique, so getting professional advice is essential. Our attorneys at Lonich Patton Ehrlich Policastri have the expertise you need and can help ensure that your retirement accounts are part of your estate plan. Contact us for a free consultation by calling 408-553-0801 so you can protect your family’s financial future.
Disclaimer: This article does not constitute a guarantee, warranty, or prediction regarding the outcome of your legal matter.