Hand Putting Coins in Glass Jar with Retro Alarm Clock

What Happens to My Retirement Account When I Die? 

The Elder & Disability Law Firm, APC Dec. 7, 2022

Retirement accounts are treated differently than other assets when it comes to estate planning and distribution upon one’s death. Real property, cars, art collections, investments, and other assets normally will have to be probated if the primary owner dies unless that person established a living trust. In that case, the successor trustee of the decedent will take control of the estate and distribute assets according to the terms of the trust.  

When it comes to retirement accounts, they are treated completely differently than most other estate assets. A retirement account such as a 401(k) or IRA will have a designated beneficiary or beneficiaries, and the transfer does not have to go through probate or through the successor trustee.  

The Internal Revenue Service (IRS), however, has specific rules regarding how the funds are treated after the death of the account holder. The rules can be complex and not easy to understand, so it is important to consult with an experienced estate planning attorney when you inherit a retirement account.  

If you’re in or around Redlands, California, and you have questions or concerns about your retirement account or a loved one who has designated you as a beneficiary, contact the estate planning attorneys at The Elder & Disability Law Firm, APC. We will review your situation and advise you of your best options to avoid unnecessary taxes upon inheriting a retirement account. We also proudly serve clients in Ranch Cucamonga, Riverside, and Palm Springs, California. 

What Happens to a Decedent’s Retirement Account? 

As mentioned earlier, retirement accounts pass directly to beneficiaries without probate or trust administration. That’s the easy part. How the beneficiaries access the funds for their own use depends to a large extent on their age and the age of the account holder upon death.  

Note here that federal law requires holders of 401(k) and other pension plans to name their spouse as the recipient. On an Individual Retirement Account (IRA), however, you can name anyone. In California, it’s also important to note that your spouse, even on an IRA, is entitled to one-half of everything in the retirement account that was accumulated during the time of marriage.   

So, even if you bequeath your IRA to someone other than your spouse, your spouse is still legally entitled to half based on the contributions made during the marriage. On most other plans, the spouse must be named by law. 

Options for Receiving Funds from a Retirement Account 

Here’s where it gets tricky. The rules – established by the IRS -- often change depending upon the age of the decedent at death and the age and status of the beneficiary. If you are a surviving spouse, you can:  

TREAT THE ACCOUNT AS YOUR OWN: You can designate yourself as the account owner, make contributions and withdrawals and even name new beneficiaries. Withdrawals before the age of 59½ are subject to a 10 percent tax penalty, and when you reach 70½ years of age, you must make the annual required minimum distributions.  

ROLL THE ACCOUNT OVER INTO YOUR OWN ACCOUNT: You have 60 days after the death of the account holder as a surviving spouse to roll over the funds into your own retirement account. The same rules for early withdrawals and required minimum distributions still apply. 

CONTINUE AS THE BENEFICIARY: This works best when the account holder dies before 70½ and the beneficiary is younger than 59½. When the beneficiary reaches 59½, the account can be rolled over. Required distributions can be delayed until the decedent would’ve reached the required age of 70½. 

TAKE THE 5-YEAR RULE OPTION: This applies if the account holder died before the age of 70½. This option requires the beneficiary to withdraw all of the funds by December 31 of the fifth year following the death of the holder.  

Non-spouse beneficiaries have fewer options. They cannot, for instance, treat the account as their own or roll it over into their own account. They can cash out of the account and pay taxes on it or take the 5-Year Rule Option.   

They can also treat the account as an inherited IRA and begin taking minimum distributions by December 31 of the year following the death of the account holder. If no beneficiaries are named, the account will become part of the decedent’s estate to be distributed according to probate court proceedings. 

Discover Your Options  

As you can see, the distribution, taxation, and required minimum distribution rules governing the inheritance of retirement accounts can be complex and confusing. If you’re a beneficiary, be sure to reach out for proper legal guidance before making a decision on how to treat the inheritance. Taxes could put a big dent in your inheritance if not treated correctly.  

Contact The Elder & Disability Law Firm, APC, with all your retirement account and estate planning questions and concerns. We will walk you through all the options available and provide the pros and cons of each alternative. We serve clients in Ranch Cucamonga, Riverside, and Palm Springs, California.