What Happens To Your 401(k) When You Die?
Written by
Andrew Lisa
Edited by
Nupur Gambhir
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A 401(k) is an employer-sponsored retirement account that offers tax advantages — your savings grow tax-deferred, and withdrawals are taxed as ordinary income in retirement. Naming a beneficiary is crucial, as this person inherits both the account and its tax obligations when you pass away. Without one, your 401(k) becomes part of your estate and must go through probate.
This article explains what happens to your 401(k) when you die, why naming a beneficiary matters, and how your beneficiary’s relationship to you affects their inheritance options.
The Importance of Naming a Beneficiary for Your 401(k)
Naming a beneficiary to your 401(k) avoids the long, expensive and often frustrating legal process of probate, where courts determine the distribution of a deceased person’s assets. Who inherits your 401(k) depends on your marital status and whether you’ve named a beneficiary. Here’s how it typically works:
- If you’re married: Your spouse automatically inherits your 401(k) unless you’ve named someone else as the beneficiary.
- If you’re single: The account becomes part of your estate and goes through probate if no beneficiary is named.
- If you name a beneficiary: That person inherits the 401(k), even if your will lists someone else.
- You can split the account: Divide it among multiple beneficiaries if you choose.
- You can plan ahead: Name a primary beneficiary and one or more contingent beneficiaries, who inherit the account if the primary beneficiary dies first.
What Happens to a 401(k) When You Die
If you pass away before retirement, what happens to your 401(k) depends on your relationship to the beneficiary.
If the Beneficiary Is Your Spouse
A spouse automatically inherits your 401(k) if no other beneficiary is named. The IRS also grants spouses more flexibility than any other heir. A surviving spouse can choose to:
- Keep the 401(k) as an inherited account
- Receive a penalty-free lump-sum payout
- Take distributions based on their own life expectancy
- Delay withdrawals until the deceased spouse would have turned 72
- Roll the balance into their own IRA
If the Beneficiary Is Not Your Spouse
Under the SECURE Act of 2019, the rules for non-spouse beneficiaries changed. Their options now depend on whether they qualify as an “eligible designated beneficiary.” This group includes:
- The deceased account holder’s spouse or minor child
- Someone who is chronically ill or disabled
- A beneficiary less than 10 years younger than the original account owner
Eligible designated beneficiaries can stretch withdrawals over their lifetime. Everyone else — known as non-eligible designated beneficiaries — must follow the 10-year rule, which requires the entire 401(k) balance to be distributed within 10 years of the account owner’s death.
How 401(k) Beneficiary Rules Affect Taxes
Unlike after-tax Roth accounts, income tax is owed on all distributions from 401(k)s, no matter when they’re received. When beneficiaries inherit a 401(k), they inherit the original account holder’s tax obligations, as well.
Whether it’s a spouse receiving a lump sum, an eligible designated beneficiary taking periodic withdrawals, or a non-eligible designated beneficiary drawing down the account over the course of a decade, the IRS taxes withdrawals as ordinary income.
Next Steps for 401(k) Beneficiaries After the Account Owner Dies
The steps a beneficiary must take after inheriting a 401(k) depend on their relationship to the account holder.
| Scenario | Outcome and Considerations |
|---|---|
| Named beneficiary | The account transfers directly to the beneficiary, avoiding probate and following the plan’s specific rules. |
| No beneficiary or plan defaults used | The account enters probate, delaying access and exposing funds to creditors and legal disputes. |
| Spouse beneficiary | Offers the most flexibility, including rollover options, deferred distributions, and favorable required minimum distribution (RMD) rules. |
| Non-spouse beneficiary | Must follow the 10-year withdrawal rule (with limited exceptions) and cannot roll the account into their own IRA. |
| Roth 401(k) inheritance | Generally tax-free if the account is qualified. The same process and timelines apply. |
| Paperwork and tax planning | Requires a death certificate, completed forms, and often multiple copies. A tax-smart withdrawal strategy is essential. |
401(k) Taxes and Estate Planning Considerations
Most beneficiaries won’t owe estate taxes on an inherited 401(k), thanks to the IRS’s high federal estate tax exemption of $13.99 million. However, income taxes are often still due on withdrawals — making it essential for heirs to plan ahead for potential tax bills.
Traditional 401(k)
Traditional 401(k)s are funded with pre-tax contributions and grow tax-deferred. When the account is inherited, so are the taxes. Withdrawals are taxed as ordinary income, whether taken all at once or spread over time.
Spouses have the most flexibility. They can roll the funds into their own retirement account, delay distributions, or take withdrawals based on their life expectancy. Non-spouse beneficiaries generally have to withdraw all funds within ten years of the account owner’s death. In all cases, income taxes apply to the money that’s taken out.
Roth IRA
Roth IRAs are funded with after-tax dollars, which means withdrawals are usually tax-free as long as the account has been open for at least five years before the owner’s death.
If the account hasn’t met the five-year rule, investment earnings may be taxed. Spouses can treat the inherited Roth IRA as their own and continue tax-free growth. Non-spouse beneficiaries must withdraw the full balance within ten years, following the same 10-year rule as traditional accounts.
Health Savings Account (HSA)
Health Savings Accounts have a unique triple tax benefit. Contributions are deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free.
If a spouse inherits the HSA, it becomes their own account and keeps its tax advantages. For non-spouse beneficiaries, the account loses its HSA status and becomes taxable based on its fair market value at the time of inheritance.
Key Considerations and Next Steps
Anyone who contributes to a 401(k) should name a beneficiary and keep that information up to date. It’s equally important for beneficiaries to understand what happens to the account and the potential tax implications after the account holder’s death.
Most beneficiaries will owe ordinary income tax on withdrawals, but spouses typically have more flexibility and time to make decisions than non-spouses. Before taking any action, contact your plan administrator to confirm your options. A tax professional or financial advisor can also help you create a withdrawal strategy that minimizes taxes and meets IRS requirements.
