Estate Planning · Estate Administration

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

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When someone dies with an IRA, 401(k), or other retirement account, the account does not automatically become part of their estate and does not pass through their will. Retirement accounts pass directly to whoever is named as beneficiary on the account — and that designation controls the transfer regardless of what the will says.

That simple fact has enormous consequences. A beneficiary designation made decades ago may direct retirement assets to an ex-spouse, a deceased relative, or someone the account holder would no longer have chosen. And once the account owner dies, the designation cannot be changed. Understanding how retirement accounts transfer at death — and how Pennsylvania inheritance tax applies to inherited accounts — matters both for estate planning and for beneficiaries dealing with a recent death.

At Lebovitz & Lebovitz, P.A., we assist families throughout Allegheny County with estate administration, beneficiary disputes, and the coordination of retirement assets with the broader estate plan. If you are dealing with an inherited retirement account or planning ahead to protect your own, we can help you understand the options and the consequences.

Beneficiary Designations Control the Transfer

Retirement accounts — IRAs, 401(k)s, 403(b)s, and similar plans — are non-probate assets. They pass outside the will entirely. The account custodian transfers the account directly to the named beneficiary upon receiving a death certificate and the required paperwork. No probate proceeding is required, and the will has no authority over the transfer.

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. The key point here is that an outdated designation — one naming a deceased person, an ex-spouse, or no one at all — can produce results the account owner never intended and that the estate cannot easily correct after death.

Spouse Beneficiaries

A surviving spouse who inherits a retirement account has more options than any other beneficiary. A spouse can roll the inherited IRA or 401(k) directly into their own IRA, treating it as their own account. This resets the required minimum distribution schedule based on the spouse’s own age, which can significantly extend the tax-deferred growth period.

Alternatively, a surviving spouse can keep the account as an inherited IRA. This may be advantageous if the surviving spouse is younger than 59½ and needs to access the funds without the 10 percent early withdrawal penalty that applies to distributions from one’s own IRA before that age.

Non-Spouse Beneficiaries and the SECURE Act 10-Year Rule

The rules for non-spouse beneficiaries changed dramatically with the SECURE Act, which took effect January 1, 2020, and were further clarified by SECURE 2.0. Under current law, most non-spouse beneficiaries who inherit an IRA or 401(k) must withdraw the entire account within ten years of the account owner’s death. This is known as the 10-year rule.

The 10-year rule replaced the old “stretch IRA” strategy, which allowed beneficiaries to take distributions over their own life expectancy — sometimes decades — deferring income tax on the inherited funds for a much longer period. That planning strategy is largely no longer available for most beneficiaries.

Certain beneficiaries are exempt from the 10-year rule and may still use a life-expectancy distribution schedule. These include 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 reaches the age of majority, the 10-year rule then applies to the remaining balance.

Pennsylvania Inheritance Tax on Inherited Retirement Accounts

Pennsylvania inheritance tax applies to inherited retirement accounts, including IRAs and 401(k)s. The tax rate depends on the relationship between the deceased account owner and the beneficiary. Transfers to a surviving spouse are taxed at zero percent. Transfers to direct descendants — children and grandchildren — are taxed at 4.5 percent. Transfers to siblings are taxed at 12 percent. Transfers to all other beneficiaries are taxed at 15 percent.

The inheritance tax is assessed on the value of the account at the date of death, not on the distributions as they are taken. This means a beneficiary who inherits a large IRA may owe inheritance tax on the full account value even before taking a single distribution. For more detail on how Pennsylvania inheritance tax applies to various assets, see our page on Pennsylvania inheritance tax.

When No Beneficiary Is Named

If a retirement account has no named beneficiary — or if all named beneficiaries have predeceased the account owner — the account typically passes to the account owner’s estate. That means the account goes through probate, loses its non-probate status, and becomes subject to the estate administration process.

An inherited IRA or 401(k) that passes through the estate also loses the 10-year rule advantage for individual beneficiaries. Estate beneficiaries are generally required to withdraw the entire account within five years if the account owner had not yet reached the required minimum distribution age, or over the remaining life expectancy if they had. Naming a living beneficiary — or updating an outdated designation — avoids this outcome.

Trusts as Beneficiaries

Naming a trust as the beneficiary of a retirement account requires careful planning. If the trust does not qualify as a “see-through trust” under IRS rules, the account may be subject to accelerated distribution requirements that eliminate most of the tax deferral benefit. A properly drafted conduit trust or accumulation trust can preserve the 10-year rule for individual trust beneficiaries, but the requirements are technical and the consequences of getting it wrong are significant.

Trusts are sometimes used as retirement account beneficiaries to provide asset protection, manage distributions for minor or disabled beneficiaries, or control how funds are used after death. These goals can be achieved, but the trust must be structured correctly in coordination with the retirement account and the overall estate plan.

Steps for Beneficiaries After an Account Owner Dies

A beneficiary who has inherited a retirement account typically needs to contact the account custodian, provide a death certificate, complete the custodian’s inherited account paperwork, and decide how to structure the account going forward. The decisions made in the first few months after inheriting a retirement account — including whether to roll it over, how to title the inherited account, and how to structure distributions — affect the tax consequences for years.

For assistance with estate administration matters involving retirement accounts, see our page on estate administration and probate in Pennsylvania.