Can a Minor Be a Beneficiary on a 401(k)?

A 401(k) plan serves as a tax-advantaged retirement savings vehicle, allowing individuals to accumulate funds for their post-employment years. A fundamental aspect of managing a 401(k) is designating beneficiaries, ensuring that accumulated assets are transferred according to one’s wishes upon their passing. It is possible to name a minor as a 401(k) beneficiary, providing a pathway for wealth transfer to younger generations. While legally permissible, this designation involves specific considerations that impact how and when the minor can access the inherited funds.

Naming a Minor as a 401(k) Beneficiary

It is legally permissible to name a minor as a direct beneficiary on a 401(k) plan. Federal rules generally do not restrict who can be named, allowing plan participants to designate their children regardless of age, including as primary or contingent beneficiaries.

When designating a minor, the beneficiary form typically requires the minor’s full legal name, relationship to the account holder, and date of birth. While direct naming is an option, many individuals choose to designate a custodian under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), or a trust, to manage the assets. For a custodial designation, the form might list “John Doe, as custodian for Minor Child, under the [State] Uniform Transfers to Minors Act.” If a trust is chosen, the designation would typically be “The [Your Name] Living Trust”. Plan administrators may have specific forms or requirements for these types of designations, so providing accurate and complete information is important to prevent complications.

Administering 401(k) Distributions to a Minor

Upon the account holder’s death, if a minor is the named beneficiary, direct control over the inherited assets is generally not possible for the minor. A court-appointed guardian or conservator of the estate is typically required to manage these funds until the minor reaches the age of majority. This often involves a probate court process to formally appoint the guardian, which can be both time-consuming and costly.

The appointed guardian assumes responsibility for managing the inherited funds, making distributions for the minor’s benefit, and submitting regular accountings to the court. Under the SECURE Act, specific Required Minimum Distribution (RMD) rules apply to minor beneficiaries. Minor children of the account owner are considered “eligible designated beneficiaries” (EDBs). Their mandatory 10-year payout period does not begin until they reach age 21. This means the entire inherited account must be distributed by the end of the calendar year the minor turns 31.

Before age 21, minor EDBs must take annual RMDs based on their life expectancy, which are overseen by the guardian. If the minor inherited from a non-parent, the standard 10-year rule applies immediately upon the account owner’s death. Inherited 401(k) distributions are taxable income to the minor. The “kiddie tax” rules may apply, taxing a portion of the minor’s unearned income, including distributions, at the parents’ tax rate if it exceeds certain thresholds, such as $2,700 in 2025.

Alternative Strategies for Minor Beneficiaries

Structuring the inheritance through alternative legal instruments can offer more control and flexibility than direct minor beneficiary designation. One common alternative is naming a trust as the 401(k) beneficiary. A trust is a legal entity that holds assets for beneficiaries, providing a mechanism to control how and when assets are distributed, potentially avoiding court guardianship, and offering tax planning advantages.

The trust document specifies the terms of distribution to the minor, allowing for staggered payments or conditions for use, such as for educational purposes. Relevant trust types include living trusts, which take effect during the grantor’s lifetime, and testamentary trusts, established through a will and effective upon death. Setting up a trust typically costs between $1,000 and $4,000, depending on complexity, but can range higher for more intricate arrangements.

Another strategy involves naming a custodian under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) as the beneficiary. These accounts allow a custodian to manage assets for the minor until they reach the age of majority, which varies by state but is commonly 18 or 21, and can be up to 25 in some jurisdictions. UGMA accounts typically hold financial assets like cash, stocks, and bonds, while UTMA accounts can hold a broader range of assets, including real estate. The simplicity of UGMA/UTMA accounts can be an advantage compared to trusts, as they are generally less costly and complex to establish.

However, once the minor reaches the age of majority, they gain complete control over the assets without restriction, which may be a concern if financial maturity is still developing. When comparing these options, trusts offer the highest degree of control over asset distribution and protection from creditors, but they involve greater complexity and cost. UGMA/UTMA accounts are simpler and more economical, but they provide less control once the minor reaches the age of majority. Direct designation, while straightforward, necessitates court intervention for asset management until the minor is an adult. The choice among these strategies depends on the desired level of control, the complexity of the estate, and the specific needs of the minor beneficiary.