401(k), IRA, and Pension After Death in NC

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Retirement accounts are often among the largest assets a person leaves behind, and they come with some of the most complicated rules in estate administration. 401(k)s, IRAs, pensions, and other retirement plans each have their own beneficiary designation rules, required distribution timelines, and tax consequences. The SECURE Act of 2019 and SECURE Act 2.0 of 2022 rewrote many of these rules, eliminating the “stretch IRA” strategy that families relied on for decades and imposing a strict 10-year distribution window on most non-spouse beneficiaries.

Getting these decisions right can save tens of thousands of dollars in taxes. Getting them wrong can trigger unnecessary tax bills, penalties, and missed opportunities that cannot be undone.

This guide covers how to handle retirement accounts after a death in North Carolina – from identifying the accounts to making the distribution decisions that will shape the beneficiary’s tax picture for years to come.

Afterpath helps North Carolina families navigate the complex rules surrounding inherited retirement accounts. Our Pathfinder AI guide explains SECURE Act distribution requirements for your specific situation, our Task Management system tracks distribution deadlines, and our NC Compliance Engine identifies North Carolina-specific tax implications that many families overlook.

Types of Retirement Accounts

Before diving into the rules, it helps to understand the main categories of retirement accounts and how they differ.

Pre-Tax (Traditional) Accounts

Traditional IRA: Individual retirement account funded with pre-tax contributions. Distributions are taxed as ordinary income.
Traditional 401(k): Employer-sponsored plan funded with pre-tax salary deferrals. Distributions are taxed as ordinary income.
403(b): Similar to a 401(k) but for employees of public schools, nonprofits, and certain government entities.
457(b): Deferred compensation plan for state and local government employees and certain nonprofits.

After-Tax (Roth) Accounts

Roth IRA: Funded with after-tax contributions. Qualified distributions (including to beneficiaries) are tax-free.
Roth 401(k): Employer-sponsored Roth account. Same tax treatment as Roth IRA for distributions.

Defined Benefit Plans (Pensions)

Private pensions: Employer-funded retirement benefits that pay a monthly income. Rules vary by plan.
NC Teachers’ and State Employees’ Retirement System (TSERS): The defined benefit pension for NC state employees and public school teachers.
NC Local Governmental Employees’ Retirement System (LGERS): The defined benefit pension for NC county, city, and local government employees.

Other Retirement-Related Accounts

NC 529 Plan: While not a retirement account, these education savings accounts have their own transfer and beneficiary rules.
Health Savings Accounts (HSAs): Pass to a named beneficiary, with different tax treatment depending on who inherits them.

Beneficiary Designations Override the Will

This is the single most important concept for retirement accounts: the beneficiary designation on the account controls who inherits it, not the will. This is the same principle that applies to life insurance.

If someone named their spouse as beneficiary on their 401(k) twenty years ago and never updated it after a divorce and remarriage, the ex-spouse is likely the legal beneficiary of that account – regardless of what the will says.

Checking Beneficiary Designations

For each retirement account, contact the plan administrator or custodian and request a copy of the beneficiary designation form on file. You need to know:

Who is named as primary beneficiary (and their percentage)
Who is named as contingent beneficiary
When the designation was last updated
Whether the designation was properly executed (signed, witnessed if required)

Special Rule for 401(k) Plans: Spousal Consent

Under federal law (ERISA), a married participant’s 401(k) plan must pay the death benefit to the surviving spouse unless the spouse has signed a written waiver consenting to a different beneficiary. This federal requirement overrides state law and the account holder’s wishes. If the decedent was married and named someone other than their spouse as 401(k) beneficiary, verify that a valid spousal consent waiver exists.

This rule applies to 401(k), 403(b), and most employer-sponsored plans. It does not apply to IRAs.

For more on how different assets interact with probate, see our guide on probate vs. non-probate assets.

The SECURE Act: The 10-Year Rule

The SECURE Act of 2019 fundamentally changed how inherited retirement accounts are distributed. Before the SECURE Act, non-spouse beneficiaries could “stretch” distributions from an inherited IRA over their own life expectancy, potentially spanning decades and minimizing the annual tax hit. The SECURE Act eliminated the stretch for most beneficiaries.

The New Rules (for deaths after January 1, 2020)

Eligible Designated Beneficiaries (EDBs) – these five categories can still use the life expectancy (“stretch”) method:

Surviving spouse
Minor children of the account owner (but only until they reach the age of majority – 21 under the SECURE Act 2.0 – then the 10-year rule kicks in)
Disabled individuals (as defined by the IRS)
Chronically ill individuals
Individuals not more than 10 years younger than the account owner (e.g., a sibling close in age)

Non-Eligible Designated Beneficiaries – everyone else, including adult children, must distribute the entire inherited account within 10 years of the account owner’s death. There is no minimum annual distribution requirement during the 10 years (with one important exception below), but the entire account must be emptied by December 31 of the year containing the 10th anniversary of the owner’s death.

The Required Minimum Distribution Wrinkle

After significant confusion and multiple rounds of IRS guidance, the final regulations (issued in 2024) clarified that if the original account owner had already begun taking Required Minimum Distributions (RMDs) before death – which is required starting at age 73 under SECURE Act 2.0 – then non-spouse beneficiaries subject to the 10-year rule must also take annual RMDs during the 10-year period, calculated based on their own life expectancy. The entire remaining balance must still be distributed by the end of year 10.

If the account owner died before their RMD required beginning date, the 10-year rule applies without annual RMD requirements.

This distinction matters for tax planning. If annual RMDs are required, the beneficiary has less flexibility to time distributions for tax efficiency.

Options by Beneficiary Type

Surviving Spouse

The surviving spouse has the most options for an inherited retirement account:

Option 1: Roll over to their own IRA. The surviving spouse can roll the inherited account into their own IRA (or treat an inherited IRA as their own). This is often the best option for a younger surviving spouse who does not need the funds immediately. The account then follows the spouse’s own RMD schedule, and future beneficiaries will be subject to the standard inheritance rules.

Option 2: Remain as beneficiary (Inherited IRA). The spouse can keep the account as an inherited IRA. RMDs are based on the spouse’s life expectancy, recalculated annually. This option may be advantageous if the spouse is under 59 1/2 and needs access to the funds without the 10% early withdrawal penalty (the penalty does not apply to inherited IRA distributions).

Option 3: Lump sum distribution. Take the entire balance at once. The full amount (except Roth) is taxable as ordinary income in the year received. This is rarely the best tax strategy unless the account balance is small.

Option 4: Disclaim. The spouse can disclaim all or part of the inherited account, which causes it to pass to the contingent beneficiary. This must be done within 9 months of the death and before the spouse has accepted any of the benefits. Disclaimer planning can be a powerful tax strategy in some situations.

Adult Children (Non-Eligible Designated Beneficiaries)

Adult children are the most common beneficiaries, and the 10-year rule applies to them. Their options:

Option 1: 10-year distribution. Distribute the account over up to 10 years. The timing strategy depends on the beneficiary’s income and tax bracket. If the beneficiary expects lower income in certain years (retirement, career change, sabbatical), accelerating distributions into those years may reduce the overall tax burden.

Option 2: Lump sum. Take everything at once. Simple, but potentially pushes the beneficiary into a much higher tax bracket.

There is no option to stretch distributions over a lifetime for adult children who inherited after January 1, 2020.

Minor Children of the Account Owner

Minor children of the decedent (not grandchildren – specifically children) can stretch distributions over their life expectancy until they reach age 21 (under SECURE Act 2.0). At age 21, the 10-year clock starts. This means a child who inherits at age 5 has until age 31 to fully distribute the account (16 years of stretch + 10 years after reaching age 21… but effectively the 10-year clock starts at 21).

A custodian or guardian manages the inherited account until the child reaches the age of majority.

Estate or Non-Designated Beneficiary

If the retirement account names the estate as beneficiary – or if no beneficiary was named – different rules apply. The account must be distributed within 5 years of the owner’s death (if death occurred before the RMD required beginning date) or over the remaining life expectancy of the deceased (if death occurred after RMDs had begun). These are generally less favorable than the 10-year rule, which is why naming individual beneficiaries is strongly recommended.

Tax Implications

Federal Income Tax

Distributions from inherited traditional (pre-tax) retirement accounts are taxed as ordinary income to the beneficiary. This means they are added to the beneficiary’s other income for the year and taxed at their marginal rate.

For large inherited accounts, the 10-year distribution requirement can push beneficiaries into higher tax brackets. Strategic distribution planning is essential.

Example: An adult child inherits a $500,000 traditional IRA. If they take it all in one year, the $500,000 is added to their other income, potentially pushing them into the 37% federal bracket. If they spread distributions over 10 years at $50,000 per year, the additional income may stay within a lower bracket.

Roth Accounts

Inherited Roth IRAs and Roth 401(k)s are subject to the same distribution timeline rules (10-year rule for non-eligible designated beneficiaries), but qualified distributions are tax-free. This makes Roth accounts significantly more valuable as inherited assets.

However, the 10-year clock still applies. The account must be fully distributed by the end of year 10, even though no tax is owed. The advantage is that the funds can grow tax-free for up to 10 years before distribution.

North Carolina Income Tax

North Carolina taxes retirement account distributions as ordinary income at a flat rate of 4.5% (2024). There is no special exemption for inherited retirement accounts in NC.

This means a beneficiary in North Carolina faces both federal income tax (up to 37%) and NC income tax (4.5%) on distributions from inherited traditional accounts. Combined, the tax bite can exceed 40% for high-income beneficiaries.

The NC Bailey Settlement

If the decedent was a retired NC state or local government employee who vested in their pension plan before August 12, 1989, their retirement benefits may be exempt from NC income tax under the Bailey v. State of North Carolina settlement. This exemption passes to beneficiaries receiving survivor benefits. Check with the NC Department of Revenue or a tax professional to determine if this applies.

Important: This guide provides general information about North Carolina probate procedures. It is not legal, tax, or financial advice. Every estate is different. Consult a qualified attorney or tax professional for advice specific to your situation.

NC State Pension Plans (TSERS and LGERS)

NC Teachers’ and State Employees’ Retirement System (TSERS)

If the decedent was a vested member of TSERS (NC state employees, public school teachers, UNC system employees), survivor benefits may be available:

If the member was receiving a retirement benefit:

The survivor benefit depends on the payment option the retiree chose at retirement
If the retiree selected a survivor option (Option 2, 3, or 4), the named beneficiary receives a continuing monthly benefit
If the retiree selected Maximum Allowance (Option 1), the benefit ends at death – but a return of any remaining contributions may be available

If the member died before retirement:

If the member had at least 5 years of service, the beneficiary may receive a return of contributions or a monthly survivor benefit (if the member had at least 20 years of service or was at least 60 with 5 years)
Contact the NC Retirement Systems Division at (877) 627-3287 to determine eligibility and file a claim

NC Local Governmental Employees’ Retirement System (LGERS)

LGERS covers county, city, and local government employees. The survivor benefit rules are similar to TSERS. Contact the NC Retirement Systems Division for the specific benefits available.

Filing a Survivor Claim

For both TSERS and LGERS:

Notify the NC Retirement Systems Division of the death
Provide a certified death certificate
Complete the required survivor benefit application forms
Provide beneficiary identification and banking information for direct deposit

Processing typically takes 6-8 weeks after all documentation is received.

Employer-Sponsored Plans: 401(k), 403(b), 457(b)

Rolling Over vs. Keeping the Employer Plan

When the decedent had a 401(k) or other employer plan, the beneficiary typically has the option to:

Roll over to an inherited IRA: This moves the funds out of the employer plan and into an IRA titled in the beneficiary’s name (as an inherited IRA). This often provides more investment options and more control. For surviving spouses, the rollover can be to their own IRA.
Keep the funds in the employer plan: Some employer plans allow beneficiaries to leave the funds in the plan. The plan’s distribution options and investment menu apply.
Take a lump sum distribution: Cash out the entire account. The plan is required to offer this option.

Practical Steps

Contact the employer’s HR department to notify them of the death
Request the plan’s beneficiary designation on file
Obtain the plan’s distribution options for beneficiaries
If rolling over, open an inherited IRA at a brokerage or bank
Complete the plan’s distribution or rollover paperwork
Ensure the rollover is done as a direct rollover (trustee-to-trustee) to avoid tax withholding

Afterpath’s Task Management system tracks each retirement account separately, with deadline reminders for distribution decisions and rollover paperwork.

NC 529 Education Savings Plans

While not retirement accounts, NC 529 plans are worth addressing because they come up frequently in estate administration.

When the account owner of a NC 529 plan dies:

The successor owner named on the account becomes the new account owner
If no successor owner was named, the account becomes part of the estate
The beneficiary of the 529 plan (the student) does not change
No tax is due on the transfer of ownership
The new owner can continue the account, change the beneficiary, or take a distribution

Under SECURE Act 2.0, beginning in 2024, 529 plan assets can be rolled into a Roth IRA for the plan beneficiary, subject to certain conditions (the 529 must have been open for at least 15 years, and rollover amounts are subject to annual Roth IRA contribution limits with a lifetime cap of $35,000).

Distribution Planning Strategies

Spreading Distributions Over the 10-Year Window

For non-spouse beneficiaries inheriting large traditional accounts, the most important decision is when to take distributions. The goal is to minimize the total tax paid over the 10-year window.

Strategies include:

Level distributions: Take roughly equal amounts each year ($50,000/year from a $500,000 account). Simple and predictable.
Front-loading: Take larger distributions in early years if the beneficiary is currently in a lower tax bracket (e.g., a young adult early in their career).
Back-loading: Defer distributions to later years if the beneficiary expects lower income in the future (e.g., approaching retirement). But beware of the mandatory distribution deadline at year 10.
Income smoothing: Adjust distributions year by year based on the beneficiary’s other income, aiming to stay within a target tax bracket.

Roth Conversion Opportunities

If the beneficiary inherits both traditional and Roth accounts, or if the account owner was still alive and considering estate planning, converting traditional IRA funds to Roth before death can benefit heirs significantly. While this strategy applies to pre-death planning, it is worth understanding because it explains why some inherited accounts are Roth and others are traditional.

Charitable Beneficiaries

If the decedent was charitably inclined, naming a charity as beneficiary of a traditional retirement account is one of the most tax-efficient charitable gifts possible. The charity pays no income tax on the distribution, effectively “zeroing out” the tax that an individual beneficiary would owe. Non-retirement assets can then be left to family members, who benefit from the stepped-up basis on appreciated assets.

Frequently Asked Questions

How long do I have to distribute an inherited retirement account?

It depends on your relationship to the deceased. Surviving spouses can roll the account into their own IRA and follow standard RMD rules. Most other individual beneficiaries (including adult children) must distribute the entire account within 10 years of the death under the SECURE Act. Eligible designated beneficiaries (disabled, chronically ill, minor children of the owner, those within 10 years of the owner’s age) can still use the life expectancy method.

Do I have to take annual distributions during the 10-year period?

If the account owner had already started taking RMDs before death (generally age 73 or older), yes – you must take annual RMDs during the 10-year period, with the remaining balance due by the end of year 10. If the owner died before the RMD required beginning date, no annual distributions are required during the 10 years, but the full balance must be out by the deadline.

Are inherited retirement accounts subject to probate?

No, in most cases. Retirement accounts with a named beneficiary (other than the estate) pass directly to the beneficiary outside of probate. They are non-probate assets. If the estate is named as beneficiary, or no beneficiary is designated, the account may go through probate. See our probate vs. non-probate assets guide for more detail.

Can Afterpath help me figure out my distribution options?

Yes. Afterpath’s Pathfinder AI guide can walk you through your specific options based on your relationship to the deceased, the type of account, the account owner’s age at death, and your own financial situation. Our NC Compliance Engine flags North Carolina-specific tax considerations, including the NC income tax treatment and the Bailey settlement exemption. And our Task Management system tracks distribution deadlines so you do not miss the 10-year window or annual RMD requirements.

What happens if I miss the 10-year distribution deadline?

Failure to distribute the full balance by the end of the 10-year period results in a 25% excise tax on the amount that should have been distributed (reduced from 50% under SECURE Act 2.0). If the error is corrected within 2 years, the penalty may be reduced to 10%. This is a costly mistake that is entirely avoidable with proper tracking.

Related Resources

Retirement Accounts, 401(k), and IRA After Death – Overview of inherited retirement accounts
Probate vs. Non-Probate Assets – Understanding which assets go through probate
Filing the Final Tax Return for a Deceased Person in NC – Tax obligations after death
How to Claim Life Insurance After a Death in NC – Another major non-probate asset to address
Managing Estate Bills During Probate – Keeping the estate’s financial obligations current

Moving Forward

Inherited retirement accounts represent both an opportunity and a responsibility. The rules are technical, the tax stakes are high, and the deadlines are real. But with careful planning, beneficiaries can maximize the value of these accounts and minimize the tax burden – honoring the decades of saving the deceased person invested in building these funds.

Do not make distribution decisions in a rush. Take the time to understand your options, consult a tax professional for large accounts, and build a distribution plan that fits your financial situation over the full 10-year window.

Afterpath was built to help you navigate exactly this kind of complexity – turning confusing regulations into clear, personalized guidance. Our Pathfinder AI guide answers your questions about inherited accounts, our task system tracks every distribution deadline, and our NC Compliance Engine ensures you meet every requirement under both federal and North Carolina law.

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