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What Happens to Your 401(k) When You Die?

Thinking about your death is never a comfortable topic, but financial planning for death is critical, including what happens to your 401(k).

Justin Cupler

Contributing Writer at Tally

December 13, 2021

Working towards retirement savings with a healthy mix of individual retirement accounts (IRAs), , bonds and a sizable 401(k)? There’s some enjoyment to watching these accounts grow as you steadily eye your retirement date. 

But have you thought about what happens to your 401(k) when you die? Does it get split up among loved ones? Does the IRS take a piece? Are there penalties involved in the process if you pass before you're 59.5 years old? 

Below, we cover this and more to help you get your 401(k) in order now, so your family's future is secured. 

What happens to your 401(k) when you die?

First and foremost, the 401(k) immediately becomes part of the deceased person's taxable estate. However, unlike other parts of an estate, the 401(k) doesn’t have to enter probate, which is the analysis and distribution of assets within a deceased person's estate to others, if the 401(k) has a living beneficiary. 

In this case, the beneficiary has immediate access to the retirement account to do as they please within RS regulations and the regulations set forth by the financial institution holding the 401(k).

The beneficiary can:

  • Cash out the 401(k) as a lump-sum distribution

  • Take periodic payouts

  • Take it as an annuity

  • Leave the money in the 401(k) if the financial institution's regulations permit it 

  • Even continue receiving minimum distributions, if the original account holder was receiving them


Who will get my 401(k)?

Who gets the retirement plan balance depends on several variables, including: 

  • if the 401(k) owner was married 

  • if a 401(k) beneficiary was listed

  • if the account owner had a will 

If the deceased is married, the 401(k) automatically transfers to the surviving spouse, regardless of who is listed as the beneficiary. The only exception is if the spouse signed a waiver of rights to the 401(k). 

If the deceased had no beneficiary and is unmarried, the 401(k) becomes part of the estate and goes through the probate process. If there was a valid will, the 401(k) will be distributed after all debts are paid according to the will.

If the deceased person doesn't have a will, the 401(k) balance is placed in an intestate estate, and the state's intestate laws dictate its distribution.

Will my 401(k) get taxed?

Yes, an inherited account carries a tax burden with it. When your 401(k) passes to a beneficiary, it’s subject to income tax, per IRS tax brackets. It may also be subject to estate tax and any local income taxes. 

Fortunately, no penalties are assessed when the 401(k) is distributed after death, so the early withdrawal penalty and any additional tax penalties won’t apply. 

What's the importance of financial planning for death?

No one wants to think about their ultimate demise, but for your family's sake, it’s important to have an estate plan in place for your finances. 

Without a financial plan in death, your loved ones may be left battling over your estate or the state may have to determine who gets what. While state laws are designed to be fair in the state's eyes, no one knows your desires or intentions better than you. You can ensure these plans are executed in death by laying it out in a well-written will. Plus, you can further control the distribution of your 401(k) by setting up beneficiaries. 

If you need help with this financial planning, speak with a financial advisor. They can walk you through the process or refer you to someone who can further assist you. 

Special considerations when naming 401(k) beneficiaries

Under federal law, your surviving spouse automatically receives your 401(k) when you die, regardless of beneficiary designation. So, even if you list your kids as named beneficiaries, your husband or wife gets your 401(k) balance. 

If you're unmarried but have minor children, it's common to list them as the beneficiary of the account. You can generally add multiple beneficiaries and list what percentage each will get. However, many financial institutions won't transfer funds directly to minors. Instead, the courts will name a trustee or guardian for the money.

For safety's sake, if you plan to leave your 401(k) to your children, create a trust now for each child and list the trusts as beneficiaries.  

You should consider naming at least one contingent beneficiary. This person receives the 401(k) as an inheritance if the primary beneficiary is deceased. If you don't set this up, the 401(k) will go into probate if the primary beneficiary is deceased.

Changing or adding a beneficiary 

Adding or changing a 401(k) beneficiary is generally simple. Most financial institutions will have an online interface to add and delete beneficiaries yourself. However, some may be a little behind the times and have a paper beneficiary form you must fill out and mail in to make changes. 

If it remains unclear how to change your beneficiary, you can always call the financial institution or plan administrator to get more information on this process. 

Get your finances in order today, for your family's sake

Securing your retirement by building a 401(k) is a huge step. When you plan for your family’s future in the event of your passing, you’re ensuring the legacy of your hard financial work. This includes what happens to your 401(k) when you die. 

With proper advice from a financial advisor or another expert, you can determine how to best set up your 401(k)'s beneficiaries or how to control the 401(k) via your will. This will ensure your 401(k) doesn't become part of an intestate estate, meaning the state steps in and determines what happens to your retirement account. 

After that is determined, you can easily go into your retirement account and change or add beneficiaries as needed. 

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