Here’s what HIVE AI had to say about “How are beneficiary designations taxed on retirement plans?”:
How beneficiary designations are taxed on retirement plans
Big picture
- Naming a beneficiary has no tax effect by itself. Taxation happens when benefits are paid. In general, a beneficiary includes in income the same portion of a retirement plan distribution the participant would have, subject to basis recovery and special rules for annuities and Roth money. 1
Employer plans and pensions: how beneficiaries are taxed
Taxable vs nontaxable portions
- Distributions to a beneficiary from a qualified plan or annuity are taxable to the extent they represent pre‑tax amounts. If the decedent had after‑tax “investment in the contract,” the beneficiary recovers that basis tax‑free under the same method the decedent would have used (for annuities, the exclusion ratio applies to each payment). 2
- A beneficiary reports pension/annuity income generally the same way the participant would have, including the ability to exclude the decedent’s remaining “investment in the contract” from income. 1
Withholding and estimated tax
- Plan distributions to beneficiaries are subject to federal income tax withholding rules for “designated distributions.” The withholding obligation is on the payor or, in some cases, the plan administrator. Beneficiaries may need to make estimated tax payments if withholding is insufficient. 3 4
Early distribution penalty
- For beneficiaries receiving from a deceased participant’s plan, the 10% early distribution tax generally does not apply to inherited distributions; however, once a surviving spouse rolls over or treats the account as their own, subsequent early withdrawals can be subject to the 10% tax. See Pub 575 for plan distribution taxation and exceptions context. 5
IRAs: beneficiary taxation and options
Spousal beneficiary choices
- A surviving spouse who inherits a traditional IRA can: treat it as their own, roll it to their own IRA or certain plans, or keep it as an inherited IRA and be treated as a beneficiary. The choice affects later RMD timing and whether early withdrawal penalties can apply to the spouse’s own IRA. 6
Non‑spouse beneficiary rollovers from employer plans
- A non‑spouse designated beneficiary of a decedent’s employer plan can move the benefit via direct trustee‑to‑trustee transfer to an “inherited IRA” set up for the beneficiary. The transfer is treated as an eligible rollover, but the receiving account is an inherited IRA (no 60‑day rollover rights), and post‑death minimum distribution rules continue to apply. 7
Required minimum distributions and excise tax
- Beneficiaries are subject to the post‑death minimum distribution framework (plan and IRA rules cross‑reference section 401(a)(9)); failure to take required amounts triggers an excise tax of 25% of the shortfall, imposed on the payee (the beneficiary). 8
Roth and designated Roth money
Designated Roth accounts in workplace plans
- Designated Roth contributions are taxed when contributed; qualified distributions are tax‑free. Beneficiary distributions from a designated Roth account follow the qualified distribution rules for designated Roth accounts. Plans must report on designated Roth contributions to participants and beneficiaries. 5 9
Roth IRAs
- While the owner has no lifetime RMDs for a Roth IRA, after death the beneficiary follows the post‑death distribution framework; qualified Roth IRA distributions to beneficiaries are tax‑free. See Pub 590‑B referenced from beneficiary guidance. 1
Beneficiary through a trust or estate
Trusts as beneficiaries
- A trust can be treated as a “designated beneficiary” if it meets the “see‑through” requirements (valid, irrevocable or becomes so at death, beneficiaries identifiable, and documentation provided to the plan). If entities or charities can receive amounts (even contingently), there may be no designated beneficiary, which can accelerate payout requirements. 7 10
Estates as beneficiaries
- If an estate is the named beneficiary, the estate (and ultimately the heirs) will be taxed on distributions; there is no “designated beneficiary,” affecting payout timing under minimum distribution rules. See the IRS written determination context on estate and trust beneficiaries. 10
Practical planning notes
Spousal rollovers from plans
- A surviving spouse receiving a distribution from a qualified plan can roll it tax‑free to their own IRA or plan; once rolled into the spouse’s own account, future taxation follows the spouse’s ownership (including possible early distribution implications). 5
Keeping beneficiary designations current
- Update beneficiary designations after life events; many plans require spousal consent to change a married participant’s beneficiary. Benefits generally can only be paid to the named beneficiaries on file. 11
Annuity RMD mechanics
- If benefits are in annuity form, RMDs and survivor payout mechanics are determined under specialized rules; the excise tax on insufficient distributions applies if required amounts aren’t paid. 12 8
What this means for you
- Expect inherited distributions to be taxable to the beneficiary except for basis recovery and qualified Roth amounts.
- Spouses have unique rollover and “treat‑as‑own” options—choose carefully, as it affects penalties and RMD timing.
- Non‑spouse beneficiaries should use direct trustee‑to‑trustee transfers to an inherited IRA to preserve tax deferral; 60‑day rollovers are not allowed for inherited assets.
- Watch withholding and estimated taxes on beneficiary distributions and avoid the RMD shortfall excise tax by meeting required payouts. 7 3 4 8
Sources
1 – IRS.gov – Retirement topics – Beneficiary 📄 Summarize
2 – IRS.gov Tax Topics 📄 Summarize
3 – IRC § 3405(d) 📄 Summarize
4 – IRS.gov Tax Topics 📄 Summarize
5 – IRS – Publication 575 Pension and Annuity Income 📄 Summarize
6 – IRS – Publication 590-A Contributions to Individual Retirement Arrangements (IRAs) 📄 Summarize
7 – IRS Determination-201203033 📄 Summarize
8 – IRC § 4974(a) 📄 Summarize
9 – IRC § 6047(f) 📄 Summarize
10 – IRS Determination-201021038 📄 Summarize
11 – IRS.gov – Retirement topics – Getting married and/or having children 📄 Summarize
12 – Treasury Regulation 54.4974-2 📄 Summarize
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