401(k) Beneficiaries Explained: Rules, Taxes and What Happens to Your Account
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Andrew Lisa
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Nupur Gambhir
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A 401(k) beneficiary is the person — or in some cases, an entity — you designate to inherit your workplace retirement account when you pass away. Naming a beneficiary is a crucial step in estate planning because it allows your 401(k) assets to transfer directly to them without going through probate, the lengthy and costly legal process that applies when no beneficiary is listed.
By choosing a beneficiary, you ensure the funds move promptly and efficiently. You can also name contingent beneficiaries, who would receive the money if your primary beneficiary is no longer living at the time of your death.
Here’s what to know about the rules, what happens if you don’t name a beneficiary, and how these decisions affect your retirement account.
Why Your 401(k) Beneficiary Choice Matters
Your choice of beneficiary is important because it ensures that your wishes are followed and your savings go to the right person, rather than a probate court making the decision on your behalf.Â
By avoiding probate, you spare your heirs the numerous associated delays and expenses, while also reducing the likelihood of family disputes and legal complications.Â
Who Can You Name as a 401(k) Beneficiary?
You can name almost anyone as a 401(k) beneficiary — or even split your account among multiple beneficiaries who each receive a set percentage. Common choices include a spouse, children, other relatives, close friends, trusts, or even charities.
For legal and tax purposes, though, the IRS sorts all of these into two broad categories: spousal and non-spousal beneficiaries. This distinction matters because spouses are granted special rights and flexibility that other beneficiaries don’t have. For example, in many cases a surviving spouse can roll the inherited 401(k) into their own retirement account or delay withdrawals until they reach retirement age. Non-spousal beneficiaries, on the other hand, usually face stricter distribution rules and timelines, which can significantly affect taxes and long-term planning.
How to Designate or Change a Beneficiary
If you’re married, your spouse automatically becomes the beneficiary upon your death unless you name someone else, which you must receive spousal consent to do under federal law.Â
People change beneficiaries due to various changes in life circumstances, such as marriage, divorce, having children, or the death of a prior beneficiary.Â
Most plan providers allow you to designate or change a beneficiary online by:Â
- Logging into your account or portalÂ
- Navigating to the beneficiaries section
- Providing the details for the primary beneficiary and, if applicable, contingent beneficiaries
- Detailing percentages for multiple beneficiaries
- Providing a spousal consent agreement, if necessary
If your plan does not allow you to complete the process online, ask your HR representative or plan provider for a beneficiary designation form. In either case, it’s essential to keep your paperwork up to date.
Your 401(k) Beneficiary Choice Overrides Your Will
Remember: whoever you list as your 401(k) beneficiary will receive the account balance, even if your will names a different heir. That’s because retirement accounts pass directly to the named beneficiary and don’t go through probate. To avoid conflicts or surprises, make sure your beneficiary designations are current and aligned with the rest of your estate plan.
401(k) Beneficiary Rules for Spouses
Under the Employee Retirement Income Security Act (ERISA), a spouse is automatically considered the default beneficiary of a 401(k) unless the account holder names someone else. To choose a different beneficiary, the account holder must have their spouse’s written and notarized consent. Without that consent, the spouse’s right to inherit the account remains in place–even if the will lists a different heir or state law suggests otherwise.
However, in community property states, both spouses own 50/50 shares of all earnings, assets and other acquired wealth, no matter whose name is on the account or who technically earned it, which can complicate estate planning.
What Beneficiaries Need to Know About Inheriting a 401(k)
Spouses who inherit a 401(k) generally have more flexibility than other beneficiaries. Their options may include:
- Taking a lump sum. Withdrawing the entire balance at once without an early withdrawal penalty.
- Keeping the account as an inherited 401(k). Allowing continued tax-deferred growth under special rules.
- Rolling the funds into an IRA. Either as a spousal rollover IRA or an inherited IRA, which can provide different distribution timelines.
- Using their own life expectancy for required distributions. Potentially spreading withdrawals over a longer period.
By contrast, most non-spousal beneficiaries must follow the IRS 10-year rule, meaning the entire account must be emptied within 10 years of the original owner’s death.
In all scenarios, withdrawals are treated as ordinary taxable income. That’s why careful tax planning is crucial to avoid surprises and make the most of the inherited funds.
Avoid These 401(k) Beneficiary Mistakes
Avoid these common mistakes, which can create complications or reduce the value of your 401(k) for your heirs:
- Not updating after major life changes. Marriage, divorce, births, and deaths can all affect who should be listed as your beneficiary.
- Believing a will overrides your 401(k) designation. It doesn’t–your beneficiary form takes priority.
- Naming minors without a trust. Without proper planning, a court must appoint a guardian to manage the funds until the child becomes of age.
- Overlooking the tax impact on heirs. Failing to plan ahead could leave beneficiaries with an unexpected tax bill.
FAQ
- Who should I name as my 401(k) beneficiary?
- You can choose almost anyone as your beneficiary. However, if you’re married, federal law gives your spouse automatic rights to the account unless they sign a written, notarized consent allowing you to name someone else. If you want to leave the funds to minor children, consider setting up a trust or custodial account—otherwise, a court may need to appoint a guardian to manage the money until the child comes of age.
- Can I change my 401(k) beneficiary anytime?
- Yes. There’s no limit to how often you can update your beneficiary. Most plans make the process simple—often just a matter of logging into your account and completing the online form. It’s a good idea to review your choices after major life events like marriage, divorce, or the birth of a child.
- What happens if I don’t name a beneficiary for my 401(k)?
- If you’re married, your spouse automatically inherits the account unless they’ve signed a notarized waiver. If you’re unmarried and haven’t named a beneficiary, the account typically goes through probate, where the court decides who receives it. This can be time-consuming and may delay access to funds.
- How are 401(k) beneficiary distributions taxed?
- Distributions from a traditional 401(k) are taxed as ordinary income. Most non-spousal beneficiaries must also follow the IRS’s 10-year rule, which requires them to withdraw the full balance within 10 years. Spouses, on the other hand, have more options: they may roll the funds into their own IRA, treat the account as their own, or use other strategies to extend tax-deferred growth.
- Does a will override my 401(k) beneficiary designation?
- No. Your beneficiary designation form always takes priority over your will, so it’s essential to keep it up to date.
