Do IRA Transfers to a Beneficiary Go Through Probate?

An individual retirement account can ultimately be part of your estate if you are not going to need the money when you are a senior. Probate is the legal process of estate administration, and some asset transfers are subject to probate after someone passes away.

This process is time-consuming and expensive, and the records are available to the general public. Because of these drawbacks, people often try to avoid it.

This begs a question: does an individual retirement account transfer go through probate?

Correct Beneficiary Designation

The answer to the question will depend on the beneficiary designation. If you name your spouse or some other individual as the beneficiary of your individual retirement account, the transfer would not be subject to the process of probate.

There would be probate court involvement if there is no living beneficiary, so you should update your estate plan if something happens to the beneficiary. You should also name an alternate beneficiary to fill the role if it becomes necessary.

Technically, someone could make their estate the beneficiary of their account. Under these circumstances, the transfer of the assets in the individual retirement account would be subject to probate.

SECURE Act

While we are on the subject of individual retirement accounts, we should pass along some very important news about a piece of legislation that is making its way through Congress.

This measure is formally called the Securing a Strong Retirement Act of 2021. Informally, it is being referred to as SECURE Act 2.0, so we will start with an explanation of the original SECURE Act.

The SECURE Act was passed in December of 2019, and it went into effect at the beginning of 2020. It changed some of the guidelines for individual retirement accounts.

Roth individual retirement accounts are funded after taxes have been paid on the income, so distributions are not taxed. With a traditional IRA, the tax situation is reversed.

You can take penalty-free distributions from a traditional account when you are 59.5 years old. This age threshold applies to distributions of the earnings from a Roth account, but you can withdraw the contributions at any age without being penalized.

Because the IRS has already been paid, you are never required to take distributions from a Roth IRA, but you are compelled to take required minimum distributions (RMDs) from a traditional account.

Prior to the enactment of the SECURE Act, the mandatory distribution age was 70.5, but the measure raised it to 72. Another change gave traditional account holders the ability to contribute into their accounts for an open-ended period of time as long as they are earning income.

Before this legislative measure came along, the contributions had to come to an end when a traditional account holder reached the mandatory distribution age.

The change that was most relevant from an estate planning perspective eliminated the “stretch IRA” strategy.

Non-spouse beneficiaries are forced to take required minimum distributions annually, but they could take only the minimum that was required by law prior to the SECURE Act.

In this manner, they would maximize the tax benefits. The strategy was especially useful for beneficiaries of Roth accounts, because the distributions are not subject to regular income taxes.

Now, all the assets must be cleaned out of either type of account within 10 years of the passing of the original account holder.

SECURE Act 2.0

The Securing a Strong Retirement Act of 2021 cleared the House Ways and Means Committee on May 5. It has bipartisan support, so there is a very good chance that it will be enacted.

This measure would increase the RMD age for traditional account holders from 72 to 75. Employers would be required to enroll all employees into their retirement plans, and employees would have the right to opt out if they choose to do so.

The savers tax credit for low and middle income people would be increased from $1000 to $1500, and the parameters would be broadened to include more taxpayers.

Another significant benefit would allow employers to provide retirement account matches for employees that are making student loan payments in lieu of IRA contributions.

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