What Is a 401k Beneficiary and What Are the Rules?

A 401k beneficiary is the individual, institution, or trust you designate to receive the funds in your retirement account upon your death. This designation is a part of financial planning that dictates the transfer of what is often a significant asset. The process ensures your retirement savings are distributed according to your wishes, bypassing the often lengthy and complex probate court process.

Selecting Your 401k Beneficiary

When you set up your 401k, you will be asked to name beneficiaries who will inherit the account. You can name a primary beneficiary, who is first in line to receive the assets. It is also a common practice to name one or more contingent beneficiaries, who will inherit the funds only if the primary beneficiary is no longer living or formally disclaims the inheritance.

You have broad latitude in choosing who can be a beneficiary. This can include your spouse, children, other relatives, or friends. You can also designate a trust, which can provide more control over how assets are distributed, a useful tool for minor children. Additionally, you may name a charitable organization to receive your savings.

Federal law provides specific protections for a surviving spouse. The Employee Retirement Income Security Act of 1974 (ERISA) generally mandates that your spouse is the automatic primary beneficiary of your 401k. If you wish to name someone other than your spouse as the primary beneficiary, you must obtain your spouse’s written consent. Your spouse must sign a formal waiver that is witnessed by a plan representative or a notary public. Without this legally binding consent, the plan administrator is required to distribute the assets to your surviving spouse, regardless of who is named on the form.

The Beneficiary Designation Process

You will complete a specific beneficiary designation form provided by your 401k plan administrator. This form is often available through an online portal on the administrator’s website, or you can request a physical copy from your company’s human resources department. It is a separate document from a will or trust, and the instructions on this form will supersede any other estate planning documents regarding the 401k assets.

To complete the form, you will need to provide specific identifying information for each person or entity you name. This includes their full legal name, date of birth, Social Security number, and their relationship to you. Providing accurate and complete information is necessary to prevent delays or disputes when it is time to distribute the funds.

It is important to review your beneficiary designations periodically and update them after any major life event. Occasions such as marriage, divorce, the birth of a child, or the death of a named beneficiary are all triggers to re-evaluate your choices. Forgetting to remove an ex-spouse after a divorce, for example, could result in them inheriting your 401k assets against your wishes.

Rules for Beneficiaries After an Account Holder’s Death

The rules governing how a beneficiary can access inherited 401k funds differ based on their relationship to the deceased account holder. A surviving spouse has the most flexible options. They can take a lump-sum distribution or roll the inherited 401k into their own IRA or another qualified retirement plan. This spousal rollover allows the funds to continue growing tax-deferred. By treating the account as their own, the surviving spouse can delay taking required minimum distributions (RMDs) until they reach the mandated age, which is 73 for individuals born between 1951 and 1959, and 75 for those born in 1960 or later.

For most non-spouse beneficiaries, such as children or other relatives, the SECURE Act changed the rules. For deaths occurring after December 31, 2019, these beneficiaries are subject to a 10-year rule. This rule requires the entire balance of the inherited 401k to be withdrawn by the end of the 10th year following the year of the original account holder’s death. If the owner died after their required beginning date for taking distributions, the beneficiary must take annual minimum distributions in years one through nine. The entire remaining balance must still be withdrawn by the end of the 10th year.

There are exceptions to the 10-year rule for certain “eligible designated beneficiaries.” This category includes minor children of the account holder, disabled or chronically ill individuals, and beneficiaries who are not more than 10 years younger than the decedent. These individuals may be able to “stretch” distributions over their own life expectancy. However, once a minor child reaches age 21, the 10-year rule is triggered, and the remaining account balance must be distributed within the next decade.

Regardless of the beneficiary type, any money withdrawn from a traditional, pre-tax 401k is taxed as ordinary income to the beneficiary. Taking a lump-sum distribution can result in a large tax bill for that year. Spreading withdrawals over the 10-year period, or over a lifetime for eligible beneficiaries, can help manage this tax liability. If the inherited account is a Roth 401k, qualified distributions are tax-free, provided the original account was opened at least five years prior.