Your retirement accounts such as 401(k)s may be some of your largest retirement assets, and you’ll likely rely on account withdrawals throughout your retirement. But if you die before you’ve used all of the funds, your 401(k) will be transferred to a beneficiary. Just as you choose beneficiaries to receive other assets, like your home, planning for your 401(k) transfer can help ensure that the process is smooth and easy.
What happens to your 401(k) if you’ve named a beneficiary
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.
What happens to your 401(k) if you haven’t named a beneficiary
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.
Options when naming a beneficiary
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).
How beneficiaries may use your 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 startedSpousal Beneficiary
A surviving spouse has more 401(k) distribution options than non-spousal beneficiaries:
- Merge the 401(k) with their own retirement plan
- Roll over the 401(k) into an IRA account
- Keep the 401(k) and deplete the account over a 10-year period
- Take a lump-sum distribution (but the entire amount will be subject to income taxes)
A spousal beneficiary may also disclaim the account and transfer it to a named beneficiary, like a child.
Non-Spousal Beneficiary
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.
How to ensure a smooth 401(k) transfer
Some careful planning can help ensure that your 401(k) is smoothly transferred to your beneficiary after your death:
- Take the time to designate a beneficiary for your 401(k). If you choose a designated beneficiary, you can keep your 401(k) out of the probate process. When you have PensionBee, you can select and change your beneficiaries inside your BeeHive.
- Keep your 401(k) beneficiary information up-to-date. If your designated beneficiary dies, you must update the plan with a new beneficiary. You may also want to periodically update the beneficiaries after life events like marriage, divorce, or a child’s birth.
- Remember that your 401(k) plan information trumps your will. Even if you’ve designated a beneficiary in your will to receive your 401(k), the information in your 401(k) plan documents takes precedence. Your 401(k) assets will go to any designated beneficiaries you’ve named directly through that plan, regardless of who’s named in the will.
- Talk with your beneficiaries. Take some time to tell your beneficiaries that they are named in your 401(k) plan. Give them copies of the beneficiary designation form and details on how to contact your plan administrator to initiate the plan’s transfer. Giving beneficiaries this information can help them access your plan during the difficult time after your death.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.
