Can a Minor Be a Beneficiary of a 401k?

A 401(k) plan is a tax-advantaged retirement savings vehicle offered by many employers. Designating beneficiaries for a 401(k) is an important step in financial planning, ensuring assets are distributed according to an individual’s wishes upon their death. This designation helps facilitate a smooth transfer of funds, potentially avoiding probate court. Individuals typically name primary beneficiaries to receive assets first, along with contingent beneficiaries who would inherit if the primary beneficiaries are no longer living.

Naming a Minor as a Beneficiary

Naming a minor as a 401(k) beneficiary is permissible, as no federal rules restrict it based on age. When designating a minor, the plan administrator will typically require the minor’s full legal name and date of birth. While it is legally possible to name a minor directly, the funds cannot be immediately disbursed to them. Minors generally lack the legal capacity to directly own or manage significant financial assets. A beneficiary designation on a 401(k) plan overrides instructions in a last will and testament. For married individuals, spousal consent is often required to name someone other than the spouse as the primary beneficiary of a 401(k) account.

Understanding the Legal Guardianship Requirement

Minors’ legal incapacity to control substantial financial assets necessitates adult oversight. If a minor is named as a direct beneficiary of a 401(k) and no other arrangements are in place, a court-appointed guardian or conservator is typically required to manage the inherited funds. This legal guardian acts on the minor’s behalf, ensuring the assets are managed responsibly until the minor reaches the age of majority, which varies by state but is typically 18 or 21.

Obtaining a court-appointed guardianship can be time-consuming, involve legal fees, and may result in an undesired guardian. Even parents, as natural guardians, do not automatically control inherited property exceeding a state-defined threshold (typically $10,000-$15,000). A court-appointed guardian of the property is responsible for protecting, preserving, and managing the minor’s assets, often requiring court approval for significant decisions and annual financial accountings.

Establishing Custodial Accounts and Trusts

To manage 401(k) proceeds for a minor beneficiary without direct court intervention, custodial accounts or trusts are commonly utilized. Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts allowing adults to transfer financial assets to minors without a formal trust. An appointed custodian manages these assets until the minor reaches the age of majority, gaining full control. Contributions to these accounts are irrevocable gifts to the minor.

UGMA accounts generally hold financial assets like cash, stocks, and bonds, while UTMA accounts offer broader flexibility, allowing for assets such as real estate, intellectual property, and art. Annual gift tax exclusion rules apply to contributions to these accounts. Funds can be used for expenses directly benefiting the child.

Alternatively, a trust can hold and manage 401(k) assets for a minor. Trusts offer greater flexibility than custodial accounts, allowing the creator to specify precise conditions for distribution, such as staggered payouts or access for specific purposes, even beyond the age of majority. A designated trustee manages assets according to the trust’s terms, avoiding complexities and costs of court-supervised guardianships. Using a “see-through” trust, which meets specific Internal Revenue Service (IRS) requirements, can also provide tax planning advantages for inherited retirement accounts.

Distribution and Tax Considerations

The distribution of inherited 401(k) assets to minor beneficiaries is significantly impacted by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. Under this law, most non-spouse beneficiaries are generally required to withdraw the entire account balance within 10 years following the original account holder’s death. However, minor children of the deceased account owner are “eligible designated beneficiaries” (EDBs), qualifying for different rules. EDBs, including minor children, can stretch distributions based on their life expectancy until age 21. At that point, the standard 10-year rule takes effect, requiring full distribution by the end of the calendar year the beneficiary turns 31.

It is important to note that distributions are typically made to the appointed custodian or trustee managing the funds for the minor, rather than directly to the child. If a minor child inherits a retirement account from someone other than a parent, the immediate 10-year distribution rule applies, without the extended stretch period.

Distributions from inherited traditional 401(k)s are taxed as ordinary income to the beneficiary. The “kiddie tax” rules apply to the unearned income of minors, including distributions from inherited retirement accounts. For the 2025 tax year, the first $1,350 of a child’s unearned income is generally tax-free, and the next $1,350 is taxed at the child’s marginal tax rate. Any unearned income exceeding $2,700 for the 2025 tax year is taxed at the parent’s marginal tax rate.

The kiddie tax applies to dependent children under age 19, or full-time students under age 24. Consulting a tax professional is advisable to navigate the complexities of these tax rules.