What Happens When an Estate Is an IRA Beneficiary?

An Individual Retirement Account (IRA) owner can designate their estate as the beneficiary of the account. This choice means that upon the owner’s death, the IRA assets do not pass directly to a person but are instead funneled into the decedent’s estate. Naming an estate as an IRA beneficiary has consequences for how the funds are distributed. It alters the timeline for distributions, changes the tax treatment of the funds, and subjects the retirement account to the court-supervised probate process.

The Estate as a Non-Designated Beneficiary

The Internal Revenue Service (IRS) classifies IRA inheritors into categories that determine distribution rules. A “designated beneficiary” must be an individual person, a status that historically allowed for the longest tax-deferral by permitting the beneficiary to “stretch” distributions over their own life expectancy.

An estate does not meet this definition and is considered a “non-designated beneficiary,” a classification it shares with entities like charities or certain trusts. This status eliminates the possibility of stretching distributions. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed rules for most human beneficiaries, often requiring a full payout within ten years. However, it did not alter the foundational rules for non-designated beneficiaries, so estates remain subject to more accelerated distribution requirements.

Distribution Rules for an Estate Beneficiary

The timeline for withdrawing funds from an IRA inherited by an estate depends on whether the original owner died before or after their Required Beginning Date (RBD). The RBD is the date an individual must start taking Required Minimum Distributions (RMDs), which is April 1 of the year after they turn 73.

If the IRA owner dies before their RBD, the estate is subject to a five-year rule. This rule mandates that the entire IRA balance must be distributed to the estate by December 31 of the fifth year following the owner’s death. For example, if the owner died in 2024, the estate has until December 31, 2029, to empty the account. Distributions can be taken at any time within this five-year window.

If the IRA owner dies on or after their RBD, the estate must take distributions based on the deceased owner’s remaining life expectancy. This is often called the “ghost life expectancy” rule, where the estate must take annual RMDs based on the decedent’s single life expectancy in the year of death, according to IRS tables. For instance, if the decedent had a remaining life expectancy of 15.4 years, the first RMD would be the account balance divided by 15.4, with the factor decreasing by 1.0 each subsequent year until the account is depleted.

Tax and Probate Implications

The accelerated distribution rules create notable income tax and probate issues. Because funds are withdrawn over a shorter period, the income tax liability is concentrated, potentially pushing the estate or its heirs into higher tax brackets. These IRA distributions are classified as “Income in Respect of a Decedent” (IRD), meaning the income retains its taxable character.

The tax on this IRD can be handled in two ways. The estate can pay the income tax by filing Form 1041, the U.S. Income Tax Return for Estates and Trusts. However, income tax brackets for estates are highly compressed, meaning the top federal rate is reached at a much lower income level than for individuals. Alternatively, the executor can distribute the income to the estate’s beneficiaries, who then report it on their personal tax returns using a Schedule K-1.

Naming the estate as the IRA beneficiary also ensures the funds become part of the probate estate. Probate is the court-supervised process for validating a will and distributing assets. This makes the IRA a matter of public record, and it is now controlled by the terms of the will. The process can cause delays and incur legal fees, executor fees, and court costs that diminish the total inheritance.

The Role of the Executor

When an estate is the IRA beneficiary, the executor of the estate assumes responsibility for managing the account. Their first step is to contact the financial institution holding the IRA to formally retitle it, for example, to the “Estate of Jane Smith, Deceased, as beneficiary of the IRA of Jane Smith.”

The executor is then responsible for adhering to the applicable distribution rules. They must determine the correct withdrawal amounts and ensure they are completed within IRS deadlines to avoid substantial penalties.

The executor also manages the tax implications of these distributions. This includes filing the estate’s income tax return, Form 1041, and deciding whether the estate will pay the income tax or pass the liability to the individual heirs using a Schedule K-1. Finally, after all taxes and estate expenses are paid, the executor distributes the remaining net proceeds from the IRA to the beneficiaries as specified in the decedent’s will.