Inheriting an IRA or 401(k) in Florida

Retirement accounts (IRAs, 401(k)s, 403(b)s) often pass outside probate — directly to whoever's named as beneficiary on the account. That's good news for skipping probate. But the tax and distribution rules for inherited retirement accounts are technical and have changed substantially under the SECURE Act (2019) and SECURE 2.0 (2022).

Bottom line: the rules now depend on who you are (spouse, eligible non-spouse, or 'designated beneficiary') and what you do with the account. Below: the current rules in plain English.

Who you are matters

• Most flexible: surviving spouse can roll the IRA into their own IRA. Treats it as if always theirs — no required distributions until age 73, full rollover rights.
• Stretch IRA still available: surviving spouse can spread distributions over their own life expectancy.
• Tax deferral preserved: continuing rollover keeps tax-deferred growth intact for decades.
• Best practice: most surviving spouses roll over to their own IRA unless special circumstances suggest otherwise.

Eligible designated beneficiaries (still get stretch)

Five categories retain the old 'stretch' (life-expectancy distribution) rules:

• Surviving spouse (already covered above).
• Minor child of the decedent: stretches over their life expectancy until they reach majority, then 10-year rule applies.
• Disabled person (per SSA standards).
• Chronically ill person (specific medical conditions).
• Beneficiary not more than 10 years younger than decedent (e.g., a sibling close in age).

These five groups can take distributions over their own life expectancy — the old 'stretch IRA' planning still works.

Designated non-spouse beneficiaries (10-year rule)

Most inheriting non-spouse adults — adult children inheriting from parents, friends, etc. — face the 10-year rule:

• Account must be fully distributed within 10 years of decedent's death.
• Annual minimums: if decedent had started Required Minimum Distributions (RMDs), beneficiary must continue them annually plus empty the account by year 10.
• No stretch: cannot extend distributions over beneficiary's lifetime.
• Tax bracket consideration: lump-sum distribution can push beneficiary into higher brackets. Strategic distribution timing within the 10 years matters.

Non-designated beneficiaries

• Estate listed as beneficiary: 5-year rule typically applies if decedent died before RMDs started. If RMDs started, beneficiary continues over decedent's remaining life expectancy.
• Trust as beneficiary: depends on trust structure. 'See-through' or 'conduit' trusts can sometimes preserve stretch for eligible beneficiaries; trusts that fail the see-through test fall back to 5-year rule.
• Charity as beneficiary: full distribution; no income tax to charity (but no stretch).

What about Roth IRAs?

• No income tax on distributions — Roth contributions were post-tax, so withdrawals are tax-free.
• Same distribution rules apply: 10-year rule for non-eligible non-spouse, life expectancy for eligible designated beneficiaries.
• Strategic value: tax-free distributions over 10 years are still highly valuable. Surviving spouses often roll Roth IRAs to maintain tax-free growth for decades.

What does NOT happen at inheritance

• No step-up in basis: retirement accounts don't get stepped-up basis. Distributions are taxed as ordinary income (Roth distributions are tax-free).
• No probate (with named beneficiary): retirement accounts pass directly to beneficiary. No probate court involvement.
• No estate tax for most: retirement accounts are part of the gross estate but typically below federal exemption. State estate tax (Florida has none) doesn't apply.
• No Florida inheritance tax: Florida has none.

Planning for the inheriting heir

• Don't rush distributions: the 10-year rule sets a deadline, not a schedule. Distributing strategically (lower-income years, before tax-bracket changes) preserves more after-tax wealth.
• Spousal rollover: if you're the spouse, almost always roll over to your own IRA. Don't take distributions from the inherited IRA without considering this.
• Inherited IRA account: open a separate inherited IRA account at the custodian. Direct transfer (not 60-day rollover, which non-spouses can't do).
• Tax modeling: especially for large IRAs, run distribution scenarios with a CPA or financial advisor before deciding the strategy.
• Consider charitable bequests: charities can be valuable IRA beneficiaries because they pay no income tax on distributions. Strategic estate planning can route IRA assets to charity and other assets to family.

Common mistakes

• Cashing out the entire IRA: triggers full income tax in one year. Almost always avoidable through proper account titling.
• Naming the estate as beneficiary: triggers 5-year rule and limits flexibility. Name individuals or properly structured trusts.
• Forgetting RMDs: under the 10-year rule with RMDs, missing an annual RMD triggers a 25% penalty (recently reduced from 50%). Set up auto-distribution.
• Not updating beneficiary designations: ex-spouses, deceased relatives, or no longer wanted beneficiaries still receiving accounts. Review every 3 years.
• Spousal mistakes: surviving spouse who takes a distribution from inherited IRA without rolling over may lose flexibility permanently.

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