Inherited 401(k) And IRA Issues

Do Inherited IRAs Go Through Probate In Ohio?

When a loved one dies, families assume the will dictates everything. But, a bank or brokerage may make unexpected changes, causing stress. Many issues arise from oversights, such as failing to update beneficiary designations after divorce or remarriage, or naming “my estate” without fully knowing the implications.

Minor children are frequently named directly, which can trigger guardianship concerns. Additionally, a prevalent issue occurs when multiple beneficiaries inherit from a single account.

If one beneficiary delays paperwork or misses a deadline, everyone can be affected. Retirement accounts are often among the largest assets an Ohio family inherits, yet they follow rules that differ significantly from those for homes, bank accounts, and personal property.

Understanding how these accounts transfer can help you avoid penalties and disputes, making the process less worrying.

The Big Surprise

IRAs and 401(k)s are transferred based on beneficiary designations, not the will.

If a valid, living beneficiary is named, the account usually transfers directly to them without probate. The custodian or plan administrator manages the transfer after receiving death documentation.

Problems arise when the beneficiary designation is missing, outdated, unclear, or disputed. If the estate is named as a beneficiary, or no beneficiary exists, probate may be required to allow an executor to collect and distribute the funds. In those cases, the process slows down, and tax consequences can worsen.

Probate Vs. Beneficiary Transfer

When a beneficiary is properly named, the account transfers outside probate. The beneficiary works directly with the custodian to establish an inherited account.

When no beneficiary exists, probate is usually required. An executor must be appointed and granted authority to handle the account. This extra step can delay distributions and reduce flexibility.

Beneficiary designations don’t just determine who inherits. They also determine how easy or difficult the process will be.

The SECURE Act Changed The Rules

For years, beneficiaries could “stretch” distributions from inherited retirement accounts over their lifetime. The SECURE Act ended that option for many people.

Under current law, most non-spouse beneficiaries must withdraw the entire account by the end of the 10th year after the account owner’s death. This is often referred to as the “10-year rule.”

This matters because distributions from traditional IRAs and 401(k)s are typically taxable. Poor planning can push a beneficiary into a higher tax bracket if withdrawals are bunched together.

Not Everyone Is Treated The Same Under The SECURE Act

Some beneficiaries receive special treatment and are exempt from the standard 10-year rule.

A surviving spouse generally has the most flexibility, including the option to roll the account into their own retirement account. Certain other beneficiaries, such as a minor child of the account owner, a disabled or chronically ill individual, or someone close in age to the decedent, may also qualify for different payout rules.

However, families frequently misunderstand these exceptions. For example, the “minor child” exception applies only to the decedent’s own child and changes once the child reaches adulthood. At that point, the 10-year clock often begins…

The 10-Year Rule Is More Complicated Than It Sounds

Many beneficiaries believe the 10-year rule means they can wait until the tenth year and withdraw everything at once. In some cases, that works. In others, it does not.

If the original account owner had already reached the age at which required minimum distributions are required, beneficiaries may need to take annual distributions in years one through nine to empty the account by the end of year ten.

This is one of the most common and costly misunderstandings we see. Missing a required distribution can trigger penalties, even if the beneficiary had no intention of wrongdoing.

IRAs and 401(k)s Are Similar (But Not Identical)

Although IRAs and 401(k)s are both retirement accounts, beneficiaries often experience them differently.

IRAs typically follow standardized procedures for inherited accounts. 401(k)s, on the other hand, are governed by the employer’s plan document. Some plans limit distribution options or require faster payouts. Others encourage rollovers into inherited IRAs.

This is why beneficiaries should contact the plan administrator early to learn which options are available, rather than assuming the rules are the same as those for an IRA.

Roth Accounts Have Their Own Rules

Roth IRAs are often viewed as “easy” because withdrawals are frequently tax-free. However, inherited Roth accounts still have distribution deadlines.

Families sometimes overlook Roth accounts because taxes are not due immediately. Even tax-friendly accounts require attention.

Penalties Can Add Up Quickly

Failing to take a required minimum distribution can lead to IRS penalties you will likely regret. Although recent changes to the law have reduced some penalties and provided temporary relief in certain years, beneficiaries shouldn’t count on future forgiveness. Stay proactive and compliant to avoid unnecessary penalties!

Retirement accounts are important in estate administration; inaction can cause financial loss. Inherited retirement accounts involve estate and tax law. Proper beneficiary designations ensure smooth transfers, but mismatches can lead to confusion and disputes.

Reviewing beneficiary designations is important for families, whether managing inherited accounts now or preventing future issues. Reach out to one of our attorneys if you need legal guidance.