401(k) Beneficiary Rules to Know

Inheriting a 401(k) comes with a range of beneficiary rules that vary depending on the beneficiary’s relationship to the account owner. Spouses generally have more options for how to receive the funds, including rolling the 401(k) into their own retirement account or taking distributions over time. Non-spouse beneficiaries, on the other hand, typically must withdraw the full amount within 10 years and potentially take required minimum distributions (RMDs) during that time. 

A financial advisor can help you create a comprehensive estate plan for your beneficiaries.  

What Is a 401(k) Beneficiary?

A 401(k) beneficiary is the individual or entity designated to receive the funds from a 401(k) account when the account holder passes away. 

When setting up a 401(k), the account holder typically has the option to name one or more beneficiaries.

• The primary beneficiary is the person who will receive the 401(k) assets first, often a spouse or child.
• If the primary beneficiary passes away or cannot inherit the assets, any contingent beneficiaries become next in line.

You are legally required to name your spouse as a beneficiary, unless you have their written permission to name someone else. Spouses often have more flexible options for managing funds as 401(k) beneficiaries.

While it is possible to name children or other family members, non-spouse beneficiaries may be subject to different withdrawal rules. It is also possible for an account holder to name a trust or charitable organization as their beneficiary.

Account holders can change their 401(k) beneficiaries at any time. It’s wise to update these designations after life events, such as marriage, divorce or the birth of a child.

Options for Surviving Spouses Who Are 401(k) Beneficiaries

If you’re a surviving spouse inheriting a 401(k), you generally have more flexibility compared to non-spouse beneficiaries. Spouses have several options for the funds, each with its own rules and tax implications. 

1. Roll the 401(k) into Your Own Retirement Account

A common option for surviving spouses is to roll the inherited 401(k) into their own IRA or 401(k). By doing so, the surviving spouse treats the assets as their own and is no longer required to take distributions until the required minimum distribution (RMD) age.

The original SECURE Act moved the RMD age from 70 ½ to 72. However, the SECURE 2.0 Act raised the RMD age to 73 for people born between 1951 and 1959, and 75 for people born in 1960 or later. ¹

Any distributions taken from the rolled-over account will be subject to ordinary income tax, and early withdrawals taken before age 59 ½ may incur a 10% penalty. ²

2. Roll the Funds into an Inherited IRA

Surviving spouses also can choose to roll the funds into an inherited IRA.

The spouse is treated as the original account owner and takes RMDs according to their own age or the spouse’s age. If the spouse is younger than the deceased, this option provides greater control over the timing of distributions.

This option can potentially minimize taxes. Additionally, withdrawals from an inherited IRA are not subject to early withdrawal penalties.

3. Leave the 401(k) in the Deceased’s Name

Another option is to leave the 401(k) in the deceased’s name and take distributions as a beneficiary.

This option works similarly to an inherited IRA, but 401(k) tax rules still apply. Distributions are subject to ordinary income tax unless the account is a Roth 401(k), in which case there is no early withdrawal penalty.

4. Withdraw the Entire Balance

A surviving spouse can also opt to withdraw the entire 401(k) balance in a lump sum.

While this offers immediate access to the funds, it comes with significant tax consequences unless it’s a Roth 401(k). The entire amount incurs ordinary income tax in the year of withdrawal. This can push the spouse into a higher tax bracket.

There is no early withdrawal penalty for spouses, but the tax burden can be substantial, especially for larger accounts.

401(k) Beneficiary Rules for Non-Spouses

Non-spouse beneficiaries of a 401(k) face different rules compared to spouses, particularly after the passage of the SECURE Act of 2019 and the SECURE 2.0 Act. 

Most non-spouse beneficiaries are more limited in what they can do with inherited funds: they can either take a lump sum withdrawal or roll the money over into an inherited IRA and withdraw all of it within 10 years. 

10-Year Withdrawal Rule

Under the SECURE Act, non-eligible non-spouse beneficiaries must withdraw an inherited 401(k)’s entire balance within 10 years of the account holder’s death.

As a result, the stretch IRA was eliminated for most non-spouse beneficiaries, who can no longer spread their withdrawals based on their life expectancy. Instead, they must empty the inherited account by the end of the 10th year following the original account owner’s death. This assumes the inherited IRA was opened after Jan. 1, 2020.

In 2024, the IRS clarified a condition if the original account holder had already begun taking RMDs before passing away. In this case, the beneficiary must continue to take these RMDs “at least as rapidly” during the 10-year period.

They must also withdraw the full balance required by the end of the 10th year. If the original account holder hadn’t begun taking RMDs, the beneficiary must still cash out the account by the end of the 10th year following the person’s death. 

There are, however, certain eligible designated beneficiaries (EDBs) who may be exempt from the 10-year rule and can take distributions based on their life expectancy.

• Minor children of the account holder, until age of majority, when the 10-year rule begins to apply
• Disabled or chronically ill individuals
• Beneficiaries not more than 10 years younger than the deceased

10-Year Rule Penalty

If a non-spouse beneficiary doesn’t empty an inherited IRA within the 10-year period under the SECURE Act, they could face significant penalties.

The IRS imposes a 25% penalty on any remaining balance not distributed within 10 years. The IRS will reduce this penalty to 10% if you correct the error within two years. 

Additionally, any remaining balance is still subject to ordinary income taxes upon withdrawal, further increasing the financial burden.

No Early Withdrawal Penalties

Non-spouse beneficiaries are not subject to the 10% early withdrawal penalty, regardless of their age when they inherit the 401(k). However, all distributions are still subject to income tax.

These rules provide non-spouse beneficiaries flexibility in managing inherited assets. Still, it’s important to plan for the tax implications of required withdrawals.

Naming Multiple Beneficiaries and Updating Designations

A 401(k) allows you to name more than one beneficiary, and you can decide exactly how the account will be divided.

For example, you may leave 50% of the balance to a spouse and 25% each to two children. Or perhaps you assign equal shares among several beneficiaries.

If you don’t specify percentages, most plans will divide the account equally among the named beneficiaries. This flexibility aligns your retirement account with your broader estate planning goals, whether that’s providing for family members, supporting a charitable cause or both.

Updating Designations

Keeping beneficiary designations current is just as important as deciding who gets what. A 401(k) beneficiary form typically overrides instructions in a will or trust. This means your account could go to someone you no longer intend.

For instance, if you name a spouse as your beneficiary but later divorce without updating the form, that ex-spouse may still legally inherit your 401(k). Similarly, if you welcome new children or grandchildren but never add them, you may leave them out entirely.

Life events such as marriage, divorce, the birth of a child or the death of an existing beneficiary are all times to review your designations. Many people also make it a practice to check beneficiary forms every few years, even if nothing has changed, to confirm that the paperwork on file matches their current wishes.

Taking the time to name multiple beneficiaries and update designations regularly helps ensure that the distribution of your 401(k) assets is according to your wishes, helping to prevent unnecessary problems among surviving family members.

401(k) Beneficiary Rules to Know

When someone names you as the beneficiary of their 401(k), the rules governing what you can do with those funds depend largely on your relationship to the account holder. Understanding these rules upfront can help you avoid penalties, minimize taxes and make informed decisions about what to do with the inherited account.

Surviving spouses have four main options:

• Roll the 401(k) into their own IRA or 401(k)
• Roll it into an inherited IRA
• Leave it in the deceased’s name and take distributions as a beneficiary
• Withdraw the entire balance in a lump sum

Rolling the funds into their own account lets spouses delay distributions until they hit RMD age. ³ This is 73 for those born between 1951 and 1959, and 75 for those born in 1960 or later.

A lump sum withdrawal, by contrast, means the entire balance is subject to ordinary income tax in a single year. This can push a surviving spouse into a significantly higher tax bracket.

Non-Spouse Beneficiaries Must Empty the Account Within 10 Years

Under the SECURE Act of 2019, most non-spouse beneficiaries have two choices:

• Take a lump sum
• Roll the funds into an inherited IRA

Either way, they must withdraw the full balance within 10 years of the original account holder’s death. If the account holder had already started taking RMDs before passing, the beneficiary must continue taking them at least as rapidly during that 10-year window and still empty the account by the end of year 10.

3 Types of Beneficiaries Are Exempt From the 10-Year Rule

Not every non-spouse beneficiary is subject to the 10-year deadline.

Minor children of the account holder can take distributions based on life expectancy until they reach the age of majority. At this point, the 10-year rule kicks in.

Disabled or chronically ill individuals also qualify for life expectancy distributions. Also eligible are beneficiaries who are no more than 10 years younger than the deceased account holder.

Missing the 10-Year Deadline Triggers a 25% Penalty

If a non-spouse beneficiary fails to withdraw the full balance within the required 10-year window, the IRS imposes a 25% penalty on any amount left in the account.

This penalty drops to 10% if the beneficiary correct the shortfall within two years. On top of that, all remaining funds are still subject to ordinary income tax. This only compounds the financial damage.

No Beneficiary Owes the 10% Early Withdrawal Penalty

Regardless of age, neither spouses nor non-spouse beneficiaries are subject to the standard 10% early withdrawal penalty for retirement account distributions taken before age 59 ½.

All distributions from a traditional inherited 401(k) are still ordinary income, but the early withdrawal penalty does not apply.

Your Beneficiary Form Overrides Your Will

A 401(k) beneficiary designation takes legal precedence over any instructions in a will or trust. If you name a spouse as your beneficiary before a divorce and never update the form, that ex-spouse may still legally inherit the account.

Adding beneficiaries after major life events, such as a remarriage or the birth of a child, and reviewing designations every few years ensures the account goes where you actually intend.

Bottom Line

When someone inherits a 401(k), the rules depend on whether they are a spouse. Spouses usually have more options, such as rolling the account into their own account or withdrawing funds over time. Most non-spouse beneficiaries must take all the money out within 10 years, though some exceptions apply. These rules, per the SECURE Act and SECURE 2.0, guide how and when beneficiaries must withdraw inherited 401(k) funds.

Estate Planning Tips

• A financial advisor can recommend tax and asset distribution strategies to help manage your estate. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, begin now.
• Gifting can be an effective estate planning strategy. SmartAsset’s gift tax limit guide breaks down the 2024 limit and lifetime exclusion.

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