Estate Planning · Estate Administration

What Happens to an IRA or 401(k) When Someone Dies in Pennsylvania?

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Under federal law, retirement accounts such as IRAs and 401(k) plans pass directly to the named beneficiary through a contract-based transfer mechanism that operates outside the probate system. The beneficiary designation on file with the account custodian controls the disposition of the account at the owner’s death, regardless of contrary instructions in a will or trust. The federal Employee Retirement Income Security Act of 1974 (ERISA) governs most employer-sponsored retirement plans and preempts state law regarding beneficiary designations, while individual retirement accounts are governed by the Internal Revenue Code and custodial agreements. An outdated, missing, or improperly executed beneficiary designation can direct retirement assets to an unintended recipient with no mechanism for correction after death, and Pennsylvania inheritance tax applies to the transfer based on the beneficiary’s relationship to the decedent.

Pennsylvania probate proceedings are governed by the Probate, Estates and Fiduciaries Code in Pennsylvania statutes. Estate administration is handled through the Pennsylvania Unified Judicial System in the Register of Wills and Orphans’ Court.

Stephen H. Lebovitz is an estate planning attorney in Pittsburgh who represents individuals and families in retirement account beneficiary planning, estate administration involving inherited IRAs, and Pennsylvania inheritance tax matters.

An inherited IRA does not wait for you to figure out what to do with it. The ten-year clock starts running the year after the account owner dies. Miss a required distribution and the IRS imposes a 25 percent excise tax on the amount that should have been withdrawn. Pennsylvania inheritance tax on the full account value is due within nine months of death regardless of when you take distributions. The decisions made in the first ninety days after inheriting a retirement account determine the tax consequences for the next decade.

What Is an Inherited IRA in Pennsylvania?

An inherited IRA is a retirement account transferred to a beneficiary upon the death of the original account owner. The account retains its tax-deferred status but becomes subject to federal distribution rules and Pennsylvania inheritance tax. The beneficiary does not contribute to the account and may not treat it as their own except in limited circumstances available only to surviving spouses.

Do Retirement Accounts Pass Through a Will in Pennsylvania?

Retirement accounts pass directly to named beneficiaries outside the probate process and are not controlled by the decedent’s will. The beneficiary designation on file with the account custodian at the time of death determines who receives the account, and that designation supersedes any contrary provision in a will or revocable trust. This non-probate transfer mechanism applies to IRAs, 401(k) plans, 403(b) plans, and other qualified retirement accounts. If a will directs that a retirement account be distributed to one person but the beneficiary designation names a different person, the named beneficiary on the account receives the funds. The will has no legal authority over the transfer. Courts have consistently upheld beneficiary designations even when the account owner clearly intended a different result, because the contractual designation controls the transfer as a matter of federal and state law governing retirement accounts.

For a full discussion of how beneficiary designations interact with wills and estate plans, see our page on when a beneficiary designation overrides a will in Pennsylvania. An outdated designation naming a deceased person, an ex-spouse, or no one at all can produce results the account owner never intended and that the estate cannot correct after death.

What Options Do Surviving Spouses Have?

A surviving spouse who inherits a retirement account has distribution options not available to other beneficiaries under federal tax law. The spouse may roll the inherited IRA or 401(k) directly into their own IRA, treating it as their own account and resetting the required minimum distribution schedule based on the spouse’s own age. This can extend the tax-deferred growth period significantly, particularly if the surviving spouse is younger than the deceased account owner. Alternatively, the surviving spouse may retain the account as an inherited IRA and take distributions based on their own life expectancy or the decedent’s remaining life expectancy, whichever produces a longer deferral period. Keeping the account as an inherited IRA may be advantageous if the surviving spouse is younger than fifty-nine and one-half and needs to access the funds without incurring the ten percent early withdrawal penalty that applies to distributions from one’s own IRA before that age.

What Is the SECURE Act 10-Year Rule for Non-Spouse Beneficiaries?

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), effective January 1, 2020, eliminated the stretch IRA for most non-spouse beneficiaries and replaced it with a ten-year distribution requirement. Most non-spouse beneficiaries who inherit an IRA or 401(k) must now withdraw the entire account balance within ten years of the account owner’s death. This rule applies regardless of the beneficiary’s age and eliminates the previous option to stretch distributions over the beneficiary’s life expectancy, which in some cases allowed decades of tax-deferred growth. For large inherited IRAs, dynasty trust planning may provide alternative long-term tax and asset protection strategies. Certain beneficiaries remain exempt from the ten-year rule and may still take distributions over their life expectancy, including surviving spouses, minor children of the account owner until they reach the age of majority, disabled or chronically ill individuals, and beneficiaries who are not more than ten years younger than the account owner. Once a minor child of the account owner reaches the age of majority (age eighteen in Pennsylvania for most purposes, or age twenty-six if still in school under IRS regulations), the ten-year rule applies to the remaining balance from that point forward.

How Does Pennsylvania Inheritance Tax Apply to Inherited Retirement Accounts?

Pennsylvania inheritance tax applies to inherited retirement accounts, including IRAs and 401(k) plans, at rates determined by the beneficiary’s relationship to the decedent under 72 Pa. Stat. § 9116. Transfers to a surviving spouse are exempt and taxed at zero percent. Transfers to lineal descendants (children, grandchildren, and more remote descendants) are taxed at 4.5 percent. Transfers to siblings are taxed at twelve percent. Transfers to all other beneficiaries, including nieces, nephews, and unrelated individuals, are taxed at fifteen percent. The tax is assessed on the fair market value of the account as of the date of death, not on distributions as they are taken over time. This means a beneficiary who inherits a large IRA may owe Pennsylvania inheritance tax on the full account value before taking a single distribution, and the tax liability must be paid within nine months of death to avoid interest charges. The account custodian typically will not withhold Pennsylvania inheritance tax from distributions, so the beneficiary must plan separately to satisfy the tax obligation.

For more detail on how Pennsylvania inheritance tax applies to various assets and the rates for different beneficiary relationships, see our page on Pennsylvania inheritance tax.

What Happens When No Beneficiary Is Named?

If a retirement account has no named beneficiary, or if all named beneficiaries have predeceased the account owner and no contingent beneficiaries survive, the account typically passes to the account owner’s estate by default under the terms of the custodial agreement or plan document. The account then loses its non-probate status and becomes subject to the estate administration process, including probate court jurisdiction, claims of creditors, and potential delays in distribution. An inherited retirement account that passes through the estate is also subject to less favorable distribution rules under federal tax law. If the account owner died before the required beginning date for minimum distributions, the estate generally must withdraw the entire account within five years. If the account owner died after the required beginning date, distributions may continue over the decedent’s remaining life expectancy, but this is typically a shorter period than the ten-year rule available to individual beneficiaries. Naming a living primary and contingent beneficiary avoids this outcome and preserves the account’s non-probate status.

Can a Trust Be Named as Beneficiary of a Retirement Account?

Naming a trust as the beneficiary of a retirement account requires careful planning to avoid adverse tax consequences. If the trust does not qualify as a see-through trust under Treasury Regulations Section 1.401(a)(9)-4, the account may be subject to the five-year rule or other accelerated distribution requirements that eliminate most of the tax deferral benefit. A properly drafted conduit trust or accumulation trust can qualify as a see-through trust and preserve the ten-year rule or life expectancy distributions for the individual trust beneficiaries, but the trust must meet specific requirements: it must be valid under state law, irrevocable at death, identifiable beneficiaries must be determinable from the trust document, and a copy of the trust must be provided to the plan administrator by October 31 of the year following death. Trusts are sometimes used as retirement account beneficiaries to provide asset protection for beneficiaries, manage distributions for minor or disabled beneficiaries, or control how funds are used after the account owner’s death. These goals can be achieved, but the trust must be structured correctly in coordination with the retirement account and the overall estate plan.

What Steps Should a Beneficiary Take After Inheriting a Retirement Account?

A beneficiary who has inherited a retirement account should contact the account custodian promptly, provide a certified death certificate, complete the custodian’s beneficiary claim forms and inherited account paperwork, and decide how to title and structure the inherited account. The decisions made in the first few months after inheriting a retirement account affect the tax consequences for years. A surviving spouse must decide whether to roll the account into their own IRA or retain it as an inherited account. A non-spouse beneficiary must establish an inherited IRA titled correctly in the name of the decedent for the benefit of the beneficiary. Missing deadlines or improperly titling the account can eliminate distribution options or trigger immediate tax consequences. Beneficiaries should also determine whether Pennsylvania inheritance tax has been paid or reserved by the estate, as the beneficiary is personally liable for the tax on the inherited account under Pennsylvania law.

For assistance with estate administration matters involving retirement accounts, see our page on estate administration and probate in Pennsylvania. For how these mistakes fit into the broader pattern of estate planning failures, see our page on what actually goes wrong with estate plans in Pennsylvania.

The decisions made in the first months after inheriting a retirement account affect the tax consequences for years. Without planning, outdated beneficiary designations may direct retirement assets to unintended recipients, and Pennsylvania inheritance tax may become due before the beneficiary takes a single distribution.

This page was prepared for informational purposes by the estate planning attorneys at Lebovitz & Lebovitz. The content on this page explains Pennsylvania law governing inherited retirement accounts and federal tax rules applicable to retirement account beneficiaries as of the current tax year. Pennsylvania inheritance tax rates, federal required minimum distribution rules, and the SECURE Act ten-year rule are subject to legislative change. For additional authority on beneficiary designations, see Title 20 of the Pennsylvania Consolidated Statutes governing decedents, estates and fiduciaries. For Pennsylvania Department of Revenue guidance on inheritance tax, see https://www.revenue.pa.gov/TaxTypes/InheritanceTax/Pages/default.aspx.

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