What Happens To Your 401K When You Die?

Shawn Plummer

CEO, The Annuity Expert

Your 401k is integral to your retirement savings plan. First, however, it’s essential to understand what happens to your 401k when you pass away. This guide will cover all the details you need to know about 401k and death, including beneficiaries, distribution options, and tax implications.

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What Happens To My 401k When I Die?

Want to understand 401k beneficiary rules? If you are nearing retirement or have already retired, knowing what will happen to your 401k and other retirement plans when you die is essential. This is called estate planning. When a person dies with a 401K plan, their spouse (or other beneficiaries) can inherit the funds in the account and continue using them as they, please. They must ensure they meet all IRS requirements for taking over ownership of an inherited 401K plan.

What Is A 401(K) Plan?

A 401k is an employer-sponsored retirement plan that allows you to save for retirement on a pre-tax basis. You can contribute to a 401k through payroll deductions, and the money you save grows tax-free until you start taking withdrawals in retirement.

What Happens To 401K When You Die

The Surviving Spouse

401k Rollover

What happens to a 401k when a spouse is a beneficiary? When a spouse is the surviving primary beneficiary of a 401k, they can choose to roll their deceased’s account into a new inherited IRA account or inherited IRA annuity. This will allow all tax-deferred income earned in this account to continue being deferred until the surviving spouse withdraws.

They can also use their life expectancy for taking required minimum distributions (RMDs). Finally, the surviving spouse can choose the beneficiary designations to receive the account at their death. Be sure to maintain and update the retirement plan’s beneficiary form.

WARNING: You do not want to roll over an inherited 401k into your own IRA if you are under 59½. This individual retirement account will be treated as a regular distribution and taxed with the 10% early withdrawal penalty.

Leave The 401k Alone.

A surviving spouse can manage the inherited 401k as the deceased spouse’s account owner. The surviving spouse can defer withdrawals or withdraw from the 401k, and they are exempt from the IRS early withdrawal penalty if the surviving spouse is younger than 59½ at the time of death. However, if the deceased was 70½ or older, the surviving spouse must take the required minimum distributions (RMDs) from the inherited 401k.

How To Provide Your Surviving Spouse An Income For Life

Referring to the Rollover option, you can roll over your 401k into a deferred annuity with an income rider while alive. Utilizing this method will allow both spouses to generate an income for the rest of their lives, even if the 401k runs out of money, solidifying any doubt in your financial situation now or in the future.

What Happens To Your 401K When You Die

Designating Beneficiaries For Your 401(K)

One of the most important things you can do regarding your 401k is to designate a beneficiary. This person will receive your 401k assets after you pass away. You can change your beneficiary at any time, and it’s essential to keep your beneficiary designation up-to-date to ensure that your assets are distributed according to your wishes.

Distribution Options For Beneficiaries

When your beneficiary receives your 401k assets, they have several options for how to receive the money. The options include:

The option your beneficiary chooses will depend on their financial situation and goals.

Non-Spousal Beneficiary

What happens to a 401k when a non-spousal person is a beneficiary? You have two options.

  • Inherited IRA: Non-spousal beneficiaries must begin taking RMDs by December 31 of the year following the deceased owner’s death if you elect this option. The distributions would be calculated over their life expectancy. Additional amounts can be taken out as needed. The total distribution amount would be included in taxable income each year a distribution is taken.
  • Cash-out, Lump-Sum Distribution: The entire inherited 401k would be taxable if this option is chosen. The lump sum would be treated as ordinary income taxes.

Estate Taxes

If you die leaving assets, the total value exceeds your estate’s exemption limit; your estate would have to pay a federal or state tax on the additional amount.

What Happens To My 401K If I Die

Tax Implications Of Receiving A 401(K) After Death

Understanding the tax implications of receiving a 401k after death is essential. Your beneficiary’s money will be taxed as ordinary income, and they may owe federal and state income taxes. If they choose to roll over the assets to an IRA, they will not owe taxes until they start taking withdrawals in retirement.

How To Minimize The Tax Burden

401k Owners:

  • Rollover the 401k into an annuity with an enhanced death benefit is a good idea. These enhanced death benefits increase the annuity’s value at the time of death to help offset the sizeable tax burden a non-spousal beneficiary may receive at the time of your death.
  • Another good option is to fund a life insurance policy with the required minimum distributions from the 401k.

Non-spousal beneficiaries:

Consider Life Insurance Instead of The 401k

Life insurance might be more suitable if you want to provide money to your beneficiaries. In certain circumstances, you don’t have to undergo a medical examination. To discover if you can get affordable life insurance, compare rates. Premiums can be as low as $9.37 per month. Payouts are tax-free too.

Helpful Tip: If you need a cheap service to set up your entire estate plan, we recommend:

Beneficiary 401K Rules

Next Steps

Knowing what happens to a 401k when someone dies, you can make the necessary arrangements for your account. If you have any questions about beneficiary designations or death and retirement planning, please get in touch with us. We’re here to help make the process as smooth as possible for you and your loved ones.

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Frequently Asked Questions

Can you name a beneficiary for your 401k plan?

You can name a beneficiary for your 401k plan.

Can you change your 401k beneficiary designation?

Yes, you can change your 401k beneficiary designation at any time, but you may need to follow specific procedures outlined by your plan administrator.

*Disclosure: Some of the links in this guide may be affiliate links. I may receive a commission at no cost to you if you purchase a policy. It helps us keep the lights on!

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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