What happens to your 401k when you die? All about 401k inheritance

If you have a 401k retirement plan, there is the assurance that when you die, your loved ones will be taken care of financially. However, you need to make sure that the beneficiaries of your 401k plan can be able to access the money without any hassle. And this requires knowing how inherited 401k plans work.  

How does an inherited 401k work?

When you open a 401k plan, you have to assign a primary beneficiary and alternative beneficiaries. The primary beneficiary is the one who receives the money in your 401k plan when you die before retirement age.

However, if the primary beneficiary becomes deceased, the money goes to the alternative beneficiaries. If you have no surviving beneficiaries, the money goes to your estate and it is distributed according to your wishes as stated in your will.

When you assign a primary beneficiary this can be any one of your choosing, it doesn’t necessarily have to be your spouse. However, if your spouse is not the primary beneficiary of your 401k plan, legally you are required to get the consent of your spouse in writing. After which you need to file it with your 401k retirement plan provider.

If you choose to change the primary beneficiary to assign a different one, you will still need your spouse to provide their consent in writing and you will need to file it with your 401k provider.

If when you opened your 401k plan, you assigned your spouse as your primary beneficiary and you later get divorced, your spouse inherits your 401k plan. To prevent this, you will need to assign a different primary beneficiary. You may even need a court order to effect this change.  

What are the 401k spouse and non-spouse beneficiary rules?

  • When a spouse inherits a 401k plan, they cannot withdraw less than the required minimum distributions. But they can choose to withdraw more than the required minimum distributions.
  • A spouse can choose to roll over the funds in the inherited 401k plan to an inherited IRA plan. Distributions are based on your life expectancy and you can choose to withdraw more the required minimum distributions, but you cannot withdraw less.

For a non-spouse beneficiary, rolling over inherited 401k plan funds into their own IRA account is not allowed. The beneficiary needs to create an inherited IRA account, which has to be separate from their other retirement accounts.

  • A spouse who has inherited a 401k plan is expected to have withdrawn all the money in the account within 5 years after their spouse’s death. You have the option of taking out a lump-sum distribution or the required minimum contributions.  

How to avoid taxes on your 401k inheritance

Many 401(k) plans state that beneficiaries should withdraw all the money inherited in a 401(k) account in a lump sum. To avoid paying hefty taxes on your 401(k) inheritance, do not take out the lump sum and deposit it into a non-retirement account.

If you do this, all the money you have inherited from the 401(k) plan will be subject to income tax the moment you make a withdrawal.

And if you have a sizable amount in your account, chances are that you may end up paying higher taxes. The most ideal thing to do is withdraw the money and deposit it into an inherited IRA account. That way you will be able to control your taxes.

However, keep in mind that according to IRS rules, a lump sum payment should be made before 31st December of the year after the death of the 401(k) owner. So for example, if a 401(k) owner died in 2018, the inheritance should be paid out to the beneficiary before or by December 31st, 2019. So it is important that you open an inherited IRA account before the deadline.

On the other hand, you can choose to stick with receiving the required minimum contributions, all you need to do is extend your payouts. When you spread out the withdrawals over a lengthy period of time, it means you are taking out small amounts each year. Doing this ensures that your tax bill is not affected.


Do not underestimate the process of selecting a beneficiary as it can be complicated. You may need the services of a financial adviser to help you with the process. In any case, it does not hurt to get professional help to ensure that you take the right steps.

The reason why you need to take your time when choosing a beneficiary has to do with trust. You want to assign a beneficiary who you can trust to fulfill your wishes when you die.

Aside from that, other things you need to consider include:  

  • If you have no listed beneficiaries on your 401k plan or if the listed beneficiaries are all deceased, the money in your account will be moved to your estate and distributed as stated in your will. Keep in mind that when this happens, these monies will be subject to income tax.  
  • If you get divorced and the beneficiary of your 401k account is your spouse, make sure to assign a different beneficiary as soon as possible. Otherwise, you may find that your 401k funds have been automatically transferred to your spouse.  
  • Ensure that if you have listed young beneficiaries, you assign a primary beneficiary you trust to manage your account until the beneficiaries become of age.
  • If you have listed a beneficiary who happens to die, or get sick or get married or divorced, make sure to change the beneficiary to a different one.
  • If you choose to roll over your 401k funds to a different institution or custodian, the beneficiaries’ designations do not carry over.
  • When choosing your beneficiaries ensure that they are in the low income bracket so that they don’t have to pay high taxes on the contributions.

In short, consider consulting a financial advisor before setting up a 401k plan. These plans offer numerous benefits; however, it is important that you consider what will happen to your 401k account if you die.

Knowing that your family will not struggle financially is a great thing. So make sure that you know everything you need to know about 401k inheritance.

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