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When you open your 401(k), your plan administrator usually asks you to name a designated beneficiary. The designated beneficiary is a person, organization, business, or other entity that will receive and control your plan assets after you die.
If you’ve named a beneficiary before you die, your 401(k) can be smoothly transferred to them without having to be added to your estate and going through the long probate legal process. Probate can take anywhere from months to years, so when you designate a beneficiary, they’ll have access to the funds much sooner.
Transferring your 401(k) becomes more complicated without a named beneficiary. If you haven’t designated one or more beneficiaries through your plan documents, or if your only designated beneficiary has passed away, then your 401(k) becomes part of your estate and must go through the probate process.
Some 401(k) plan documents include rules that specify default beneficiaries. Your spouse is often the first default beneficiary, followed by your children. This type of document doesn’t avoid the probate process, though. Only designated beneficiaries can receive your plan outside of probate, so even if your plan’s documents outline default beneficiaries, your 401(k) will still have to go through probate.
During probate, your assets are frozen until your will is validated and any outstanding debts are paid. Your beneficiaries will be identified and will receive your remaining assets. In addition to being time-consuming, probate can be expensive, especially for higher-value estates.
If you’re married, you may name your spouse as one of your beneficiaries. The Employee Retirement Income Security Act (ERISA) states that, in most cases, your surviving spouse will automatically receive your 401(k) benefits after you die, even if you haven’t specifically named your spouse.
However, you can choose one or more beneficiaries in addition to or in place of your spouse. Your beneficiary could be a child, a nonprofit, an educational institution, or even a business. If you’re married and choose a beneficiary other than your spouse to receive 50% or more of the assets, the ERISA requires your spouse to sign a waiver consenting to that change.
You can also designate multiple beneficiaries, specifying the percentage of your account that each is to receive. For example, you might give 50% of the account to your spouse and 50% to a child. If one of multiple named beneficiaries passes away before inheriting your 401(k), their percentage of the assets will be transferred to the other named beneficiaries. In this example, if your spouse were to die, your child would receive the full 401(k).
Your beneficiaries have several options for using your 401(k), but they need to follow several rules. It’s also important that they are prepared for tax implications, since they will need to pay taxes on withdrawals. Large sum withdrawals can also change a beneficiary’s tax bracket and impact their tax responsibility.
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Get startedA surviving spouse has more 401(k) distribution options than non-spousal beneficiaries:
A spousal beneficiary may also disclaim the account and transfer it to a named beneficiary, like a child.
A non-spousal beneficiary, like a friend, parent, or child, has more limited options and can’t roll over the 401(k) into their own retirement account.
Instead, a non-spousal beneficiary must either disclaim the account or empty it within 10 years of your death.
Non-spousal beneficiaries who are chronically ill, disabled, your minor child, or not more than 10 years younger than you, may be able to extend that withdrawal period. If they meet the requirements, the beneficiary may be able to withdraw from your account throughout their remaining lifetime.
Some careful planning can help ensure that your 401(k) is smoothly transferred to your beneficiary after your death:
Roll over all your old 401(k)s into a PensionBee Individual Retirement Account (IRA). It takes just a few minutes to sign up.
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