What happens to my dad's retirement when he dies? A guide to beneficiary distribution and taxes

According to the Social Security Administration, one in three adult children has acted as a financial caregiver for a parent. Understanding what happens to my dad's retirement when he dies is a critical, and often complex, part of this responsibility, impacting family finances and future security.

Quick Summary

When a parent passes, their retirement funds typically transfer to designated beneficiaries outside of the will, but the outcome is determined by the account type and beneficiary status. Different rules, including the 10-year payout for most non-spousal heirs, affect distribution and taxes.

Key Points

• Beneficiary Designations Take Priority: The individual named as the beneficiary on a retirement account inherits the funds, regardless of what the deceased's will specifies.

• Account Type Determines Rules: Different rules apply to IRAs, 401(k)s, and pensions, with spousal and non-spousal beneficiaries having different options.

• SECURE Act's 10-Year Rule: For most non-spousal beneficiaries of accounts inherited after 2019, the entire balance must be distributed within a decade, accelerating potential tax burdens.

• Spouses Have More Flexibility: Surviving spouses generally have more options, including rolling the inherited funds into their own retirement accounts to continue tax-deferred growth.

• Taxes are a Major Consideration: Distributions from inherited traditional retirement accounts are subject to income tax, making strategic withdrawal planning essential.

• Probate is Likely Without a Beneficiary: If no beneficiary is named, the retirement account may pass to the estate and be subject to the potentially lengthy and costly probate process.

Your First Steps After a Parent's Passing

Losing a loved one is emotionally difficult, but navigating the financial matters that follow is an essential step toward securing your family’s future. The initial actions you take regarding your father's finances can significantly impact the outcome. Your first priority should be to gather critical documents and inform the relevant institutions.

• Locate all retirement account information: This includes statements for any 401(k)s, IRAs, pensions, or other retirement plans. You will need the account numbers and the name of the financial institution or employer.
• Find beneficiary designation forms: These documents are crucial. The beneficiary listed on the account will inherit the funds, overriding any instructions in a will. Many people fail to update these, which can cause unexpected complications.
• Obtain certified death certificates: You will need multiple copies to send to each financial institution to formally begin the claims process.
• Contact the plan administrators: For each account, reach out to the financial company or your father's former employer to notify them of his death and start the process of claiming benefits.

Understanding Beneficiary Designations vs. Your Will

One of the most important aspects of inheriting retirement assets is understanding the legal hierarchy. Your father's will or trust dictates the distribution of most of his assets, but retirement accounts are typically different. These accounts are governed by beneficiary designations, which are separate legal instructions.

Primary vs. Contingent Beneficiaries

• Primary Beneficiary: This is the first person or people in line to inherit the account. If multiple primary beneficiaries are named, the assets are split among them according to the percentages designated by the account holder.
• Contingent Beneficiary: This is the backup inheritor. A contingent beneficiary receives the funds only if all primary beneficiaries are deceased or cannot be located.

Different Accounts, Different Rules

The specific rules for inheritance vary significantly depending on the type of retirement account your father held. You must know the account type to understand your options.

Inheriting an IRA (Traditional or Roth)

For most non-spousal beneficiaries inheriting an IRA after 2019, the SECURE Act of 2019 requires that the entire inherited account be distributed within a 10-year period. This can have major tax implications, as the withdrawals are typically taxed as ordinary income for traditional IRAs.

Inheriting a 401(k) or Other Employer-Sponsored Plan

If your father had a 401(k), the rules might differ. Federal law, specifically ERISA, mandates that the surviving spouse is the beneficiary unless they have legally waived their rights. If there is no surviving spouse, the plan's beneficiary designation takes precedence. Non-spousal beneficiaries of a 401(k) are also subject to the 10-year rule under the SECURE Act.

Inheriting a Pension

Pensions (defined benefit plans) are more complex. The plan’s rules determine if there are survivor benefits. A surviving spouse often receives a lifetime annuity, but for unmarried individuals, the pension may have ceased upon the retiree's death unless a specific beneficiary designation was made for a reduced survivor benefit.

Options for Spousal vs. Non-Spousal Beneficiaries

Your relationship to the deceased plays a major role in your inheritance options. Spouses have far more flexibility than non-spousal heirs.

Spousal Beneficiary Options

1. Rollover to Your Own IRA: A surviving spouse can roll the inherited funds into their own IRA, treating the assets as their own. This allows them to continue tax-deferred growth and delay Required Minimum Distributions (RMDs) until they reach the required age.
2. Treat as Inherited IRA: The spouse can keep the account as an inherited IRA, but with special rules that allow them to delay RMDs and take distributions based on their life expectancy.

Non-Spousal Beneficiary Options

• 10-Year Rule: Most non-spousal heirs must empty the inherited account within 10 years. There are specific rules regarding RMDs for inherited IRAs depending on whether the original owner had already started taking them. For most post-2019 deaths, this can accelerate the tax burden.
• Cash Out: You can take a lump-sum distribution, but this can result in a significant and immediate income tax liability, especially for a large account.

What if there was No Designated Beneficiary?

If your father died without naming a beneficiary on his retirement account, the process becomes more complicated. The funds will likely go to his estate, meaning they will be subject to probate. This is a legal process where a court validates the will and oversees the distribution of assets. It can be lengthy and expensive, and the outcome will be determined by state law or the deceased's will.

Understanding the Tax Implications

Inheriting retirement assets is not like inheriting other assets, such as a home. The funds are often considered pre-tax, meaning they are taxed as income when they are withdrawn. The SECURE Act’s 10-year rule can be particularly impactful for non-spousal beneficiaries, potentially pushing them into a higher tax bracket as they withdraw the funds over a shorter period.

Tax Considerations for Beneficiaries

1. Income Tax: All distributions from a traditional inherited IRA or 401(k) are typically taxed as ordinary income in the year they are received.
2. No Early Withdrawal Penalty: Beneficiaries do not face the 10% early withdrawal penalty, regardless of their age, when taking distributions from an inherited account.
3. Estate Tax: The federal estate tax is generally only applicable to very large estates (over $13 million in 2025). Some states have their own estate or inheritance taxes.
4. Roth IRA Advantage: Inheriting a Roth IRA is generally tax-free, as contributions were made with after-tax dollars. However, the 10-year payout rule still applies for most non-spousal heirs.

Comparison of Beneficiary Options

Feature	Surviving Spouse	Non-Spouse Beneficiary (Post-2019)
Payout Timeline	Can roll over into own IRA and use their own life expectancy to delay distributions.	Typically must empty the account within 10 years.
Control over Funds	Can take ownership of the account, allowing for potential consolidation and continued growth.	Cannot add funds to an inherited account.
Tax Implications	Can defer income taxes by rolling over.	May face accelerated income tax burden over the 10-year payout period.
Account Protection	Continued ERISA and state-specific creditor protection may apply.	Inherited IRAs for non-spouses have limited protection from creditors, depending on state laws.

Navigating the Process: Action Steps

1. Consult a Professional: A financial advisor or tax professional is crucial for understanding the complex rules and making the best decisions for your financial situation. They can help you model the tax implications of different withdrawal strategies.
2. Open an Inherited IRA: If you are a non-spousal beneficiary of an IRA, the funds must be transferred into a special inherited IRA account, sometimes called a Beneficiary IRA. You cannot simply put the money into your personal account.
3. Create a Withdrawal Strategy: Work with your advisor to decide how to take your distributions over the 10-year period (or your own life expectancy if applicable) to minimize the tax hit. You might choose to spread the distributions evenly or take them strategically based on your income in a given year.
4. Consider Your Own Retirement: An inheritance can be a great opportunity to fund your own retirement. If your circumstances allow, you may want to use a portion of the inheritance to maximize contributions to your own retirement accounts.
5. Be Aware of Creditor Protection: Understand that an inherited IRA does not offer the same creditor protection as a personal IRA. A 2014 Supreme Court ruling determined that inherited IRAs are not protected from bankruptcy proceedings for non-spouses.

Conclusion

Understanding what happens to my dad's retirement when he dies requires careful attention to detail, from identifying the correct documents to navigating complex tax laws. By proactively gathering information, understanding the distinction between beneficiary designations and wills, and consulting with financial and tax experts, you can make informed decisions that honor your father's legacy while protecting your financial future. As the rules surrounding inherited retirement accounts continue to evolve, staying informed is the best way to handle this significant responsibility with confidence. For authoritative information on retirement distributions, the Internal Revenue Service offers comprehensive guidance on Retirement topics - Beneficiary.

Frequently Asked Questions

Does a will override the beneficiary form for my dad's 401(k)?

No, the beneficiary designation form on a retirement account, like a 401(k), takes legal precedence over instructions in a will. The assets will be paid directly to the person or people named on the form.

What is the 10-year rule for an inherited IRA?

The 10-year rule, introduced by the SECURE Act, requires most non-spousal beneficiaries who inherit an IRA to withdraw the entire account balance by the end of the tenth year following the original owner's death.

Is an inherited Roth IRA taxable?

No, generally, distributions from an inherited Roth IRA are not subject to income tax for the beneficiary. However, the 10-year payout rule still applies for most non-spousal beneficiaries.

What happens if my dad did not name a beneficiary for his retirement?

If no beneficiary is named, the account will typically go to your father's estate. The funds would then be distributed through the probate process according to state laws or the terms of his will, which can take a significant amount of time.

What are the first steps a beneficiary should take?

First, obtain certified death certificates. Then, locate the retirement account statements and contact the plan administrator or financial institution to start the claims process. You will need to complete forms to receive the inherited funds.

Can I roll my inherited 401(k) into my own retirement account?

If you are a non-spousal beneficiary, you cannot roll the inherited 401(k) into your personal account. You must transfer it to an inherited IRA. A surviving spouse, however, usually has the option to roll it into their own IRA.

Do I have to pay an early withdrawal penalty on my inherited retirement funds?

Beneficiaries are not subject to the 10% early withdrawal penalty that normally applies to those under age 59½. Any distributions you take from an inherited account are penalty-free, though income tax will still be owed on traditional account withdrawals.