How are Retirement Plans Collected?

Retirement accounts and IRAs are not part of the probate estate unless the decedent failed to designate a beneficiary.  If there is no named beneficiary or if the beneficiary is “my estate”, the retirement plan will pass per the terms of the will.  Otherwise, the named beneficiary will receive the retirement asset.  Retirement accounts and IRAs are paid directly to the named beneficiary outside of probate. They are subject to both estate taxes and income taxes. Because the beneficiary may be en­titled to delay the payment of income tax, it is extremely important to consult with your attorney or tax advisor before you withdraw any money from the retirement account or IRA.  There are very complex rules concerning the income tax aspect of these accounts.

How the IRA is taken and taxed first depends upon the type of beneficiary.  A surviving spouse has more options including the ability to rollover the IRA into his or her own IRA and delay taking distributions until they reach age 70 ½.  If any other person is the beneficiary, they may take a lump sum distribution and close out the inherited IRA or may set up a decedent IRA or beneficiary IRA and rollover the account into this new account.  Once the decedent/beneficiary IRA is set up, a beneficiary may take distributions over their life expectancy or fasted if needed.  There is no 10% penalty on distributions from a decedent/beneficiary IRA.  However, distributions are subject to income tax.

Warning:  These rules are complicated; you must get good tax advice to delay income taxes and to avoid penalties.