What Happens To Your 401K When You Die?

Shawn Plummer

CEO, The Annuity Expert

When you die, what happens to your 401(k)? Depending on the plan, your beneficiaries may be able to keep the account and continue making contributions, or they may have to withdraw the funds immediately. Here’s a closer look at how death affects a 401(k).

What Happens To My 401(k) When I Die?

Want to understand 401k beneficiary rules? If you are nearing retirement or have already retired, it’s essential to know what will happen to your 401k and other retirement plans when you die. 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.

The Surviving Spouse

401(k) Rollover

What happens to a 401(k) when a spouse is a beneficiary? When a spouse is the surviving primary beneficiary of a 401(k), 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 that will receive the account at the time of their death. Be sure to maintain and update the retirement plan’s beneficiary form.

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

Leave The 401(k) Alone.

A surviving spouse can manage the inherited 401(k) as the deceased spouse’s account owner. The surviving spouse can defer withdrawals or withdraw from the 401(k), 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 401(k).

How To Provide Your Surviving Spouse An Income For Life

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

Non-Spousal Beneficiary

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

  1. Inherited IRA: Non-spousal beneficiaries will be required to 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.
  2. Cash-out, Lump-Sum Distribution: The entire inherited 401(k) would be taxable income 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.

How To Minimize The Tax Burden

401(k) Owners:

  • Rollover the 401(k) 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 required minimum distributions from the 401(k).

Non-spousal beneficiaries:

Consider Life Insurance Instead of The 401(k)

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.

Next Steps

Knowing what happens to a 401(k) 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 aspects, don’t hesitate to contact us. We’re here to help make the process as smooth as possible for you and your loved ones.

What Happens To A 401(K) When A Person Dies

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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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