What Happens to a 401k When You Die? Inheritance Rules Explained

When you die, your 401k passes directly to your named beneficiary—it doesn't go through probate. The beneficiary then has several options: keep the money in the plan, roll it into an inherited IRA, or take a lump-sum distribution. The rules differ significantly depending on whether the beneficiary is a spouse or non-spouse, and the SECURE Act of 2019 changed the timeline for required distributions.

Understanding these rules matters because the wrong decision can trigger unnecessary taxes or penalties.

The Basics: 401k and Beneficiary Designations

Your 401k bypasses probate and goes directly to whoever you named as beneficiary on the account. This is true regardless of what your will says.

Key Points

• Beneficiary designation controls – Even if your will says something different, the 401k goes to the named beneficiary
• No probate involvement – 401k assets transfer directly outside the estate
• Must claim the account – Beneficiaries need to contact the plan administrator
• Taxes are the beneficiary's responsibility – Distributions are taxable as ordinary income

What If There's No Beneficiary Named?

If you didn't name a beneficiary (or the named person died first), the 401k typically goes to:

1. Your spouse (if married) – by default under ERISA rules
2. Your estate (if unmarried or spouse waived rights)

Going to the estate means the 401k must go through probate and may have less favorable tax treatment.

Spouse vs. Non-Spouse: Why It Matters

The IRS treats surviving spouses very differently from other beneficiaries. Spouses have more options and more flexibility.

Spousal Beneficiaries: Maximum Flexibility

If you inherit a 401k from your spouse, you have several options:

Option 1: Treat It as Your Own

You can roll the 401k into your own IRA or 401k. This is often the best choice because:

• No required minimum distributions until you reach age 73
• Money continues to grow tax-deferred
• You can name your own beneficiaries

Best for: Younger spouses who don't need the money immediately

Option 2: Roll Into an Inherited IRA

Keep the money separate in an inherited IRA. This allows:

• Penalty-free withdrawals at any age (no 10% early withdrawal penalty)
• Required distributions based on your life expectancy

Best for: Spouses under 59½ who may need access to funds

Option 3: Leave It in the 401k

Some plans allow surviving spouses to keep the money in the original 401k. Rules vary by plan.

Option 4: Lump-Sum Distribution

Take all the money at once. You'll pay income tax on the full amount in that tax year, which could push you into a higher bracket.

Best for: Rarely advisable due to tax impact, but may work for small accounts

Non-Spouse Beneficiaries: The 10-Year Rule

For non-spouse beneficiaries (children, siblings, friends, etc.), the rules changed significantly in 2020:

The SECURE Act 10-Year Rule

Most non-spouse beneficiaries must withdraw all funds within 10 years of the account owner's death. Key points:

• No required annual distributions – You can take money out whenever you want during the 10 years
• Full withdrawal by end of year 10 – Everything must be out by December 31 of the 10th year after death
• All distributions are taxable – You'll owe income tax on withdrawals
• No 10% early withdrawal penalty – Regardless of your age

Strategy: Spread withdrawals across multiple years to minimize tax impact. Taking a little each year is often better than one large distribution.

Eligible Designated Beneficiaries (Exceptions)

Some non-spouse beneficiaries can still use the old "stretch IRA" rules based on life expectancy:

1. Minor children of the deceased – Until they reach majority (then 10-year rule begins)
2. Disabled individuals – As defined by IRS
3. Chronically ill individuals – Certified by physician
4. Beneficiaries not more than 10 years younger – Than the deceased (like a sibling close in age)

Tax Implications of Inherited 401k

Traditional 401k (Pre-Tax Contributions)

When you inherit a traditional 401k, distributions are taxed as ordinary income:

• Withdrawals added to your taxable income
• Tax rate depends on your overall income that year
• Could push you into a higher tax bracket
• State income taxes may also apply

Example: If you inherit $200,000 and withdraw $50,000 in one year, that $50,000 is added to your other income and taxed at your marginal rate.

Roth 401k (After-Tax Contributions)

Roth 401k inheritances have better tax treatment:

• Qualified distributions are tax-free
• Account must be at least 5 years old for tax-free treatment
• The 10-year rule still applies for non-spouse beneficiaries
• But at least you're not paying tax on the distributions

When to Pay Tax

You only pay tax when you take distributions. Leaving money in the account (up to the allowed time) lets it continue growing.

Planning tip: Consider taking smaller distributions in years when your income is lower to minimize tax impact.

How to Claim an Inherited 401k

Step 1: Locate the Account

If you're not sure where the 401k is:

• Check the deceased's records for statements
• Contact their former employers
• Search the National Registry of Unclaimed Retirement Benefits
• Check with the Department of Labor's EFAST system

Step 2: Contact the Plan Administrator

Once you find the account:

• Call the plan administrator (phone number on statements)
• Identify yourself as the beneficiary
• Request a claim package

Step 3: Submit Required Documentation

You'll typically need:

• Death certificate
• Your identification
• Beneficiary claim form
• Possibly a copy of the will or trust document

Step 4: Choose Your Distribution Option

The plan administrator will explain your options:

• Spouse: Rollover, inherited IRA, lump sum, or leave in plan
• Non-spouse: Inherited IRA, leave in plan (if allowed), or lump sum

Step 5: Receive Your Funds

Processing typically takes 2-4 weeks once documentation is complete. Funds can be:

• Transferred directly to an IRA (no tax withholding)
• Sent to you as a check (mandatory 20% federal withholding)

Common Mistakes to Avoid

Mistake 1: Missing the 10-Year Deadline

Non-spouse beneficiaries who don't withdraw all funds by the end of year 10 face a 25% penalty on the amount that should have been withdrawn.

Mistake 2: Taking a Lump Sum Without Planning

Withdrawing everything at once can:

• Push you into a much higher tax bracket
• Trigger Medicare premium surcharges
• Affect eligibility for other income-based benefits

Mistake 3: Not Updating Beneficiaries

If the deceased never updated their beneficiary after divorce, the ex-spouse may be entitled to the 401k—even if the will says otherwise.

Mistake 4: Rolling Into Your Own IRA (Non-Spouse)

Only spouses can roll a 401k into their own IRA. Non-spouses must keep it in an inherited/beneficiary IRA. Rolling into your own account could trigger immediate full taxation.

Mistake 5: Ignoring State Taxes

Federal rules are only part of the picture. Your state may have its own income tax on distributions.

Special Situations

Multiple Beneficiaries

If several people inherit the same 401k:

• Each beneficiary can set up their own inherited IRA
• The 10-year clock ticks the same for everyone
• Different beneficiaries can use different withdrawal strategies

Minor Beneficiaries

Children who inherit a 401k:

• Can stretch distributions over life expectancy while minors
• Once they reach majority (18-21 depending on state), the 10-year rule begins
• Custodial accounts may be required until they're adults

Trust as Beneficiary

Naming a trust as 401k beneficiary is complex:

• May result in faster required distributions
• Trust must meet specific requirements to pass through treatment to beneficiaries
• Consult an estate planning attorney before naming a trust as 401k beneficiary

401k vs. IRA Inheritance: Key Differences

Frequently Asked Questions

Does a 401k go through probate?

No. 401k accounts pass directly to the named beneficiary outside of probate. The beneficiary designation on the account—not your will—determines who inherits.

How long do I have to take money out of an inherited 401k?

Spouses have the most flexibility and may be able to delay distributions until their own retirement age. Non-spouse beneficiaries must withdraw all funds within 10 years of the account owner's death under the SECURE Act rules.

Is an inherited 401k taxable?

Yes, for traditional 401k accounts. Distributions are taxed as ordinary income. Roth 401k distributions may be tax-free if the account is at least 5 years old.

Can I roll an inherited 401k into my own IRA?

Only if you're the surviving spouse. Spousal beneficiaries can roll the 401k into their own IRA and treat it as their own. Non-spouse beneficiaries must keep funds in an inherited/beneficiary IRA.

What happens if no beneficiary was named?

The 401k typically goes to the surviving spouse (if married) or the estate (if unmarried). Going through the estate means probate involvement and potentially less favorable tax treatment.

Can I take a lump sum from an inherited 401k?

Yes, but it's usually not advisable. The entire amount becomes taxable in one year, which could result in a much higher tax bill than spreading distributions over multiple years.

Get Help With Your Inheritance

Inheriting a 401k involves complex decisions with significant tax implications. If you need access to inheritance funds before an estate is settled (for assets that do go through probate), there are options available.