What Happens to My 401(k) When I Die? What Every Working Family Needs to Know

Your 401(k) does not pass through your will. It does not go through probate. It goes directly to whoever you named as beneficiary on the plan documents, and if you never named anyone, or if that person is no longer the right choice, the money may end up somewhere you never intended. For most working families, the 401(k) is one of the largest assets they will ever accumulate. What happens to it at death is determined by a beneficiary designation form, not an estate plan, and the rules governing how a beneficiary can receive it changed significantly in 2020.

Here is what your family needs to know before it becomes their problem to figure out.

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Your Will Does Not Control Your 401(k)

A 401(k) is a non-probate asset. That means it transfers at death according to the beneficiary designation on file with the plan administrator, not according to your will. If your will says everything goes to your spouse but your 401(k) names your mother as beneficiary, your mother gets the 401(k). The will has no power to override a beneficiary designation on a retirement account.

This surprises a lot of people. It also creates a lot of unintended outcomes. A beneficiary designation filled out when you first started the job twenty years ago may name a former spouse, a parent who has since died, or a sibling who is no longer the right choice. Until someone updates it, that old form controls the account.

Most employer-sponsored 401(k) plans automatically designate a surviving spouse as the primary beneficiary under federal law, specifically the Employee Retirement Income Security Act. A spouse can only be bypassed if they sign a written waiver consenting to a different beneficiary. For workers who are not married, or who want to name someone other than a spouse, naming a beneficiary explicitly on the plan documents is the only way to make sure the account goes where they intend.

What a Surviving Spouse Can Do With an Inherited 401(k)

A surviving spouse has more options than any other beneficiary, and those options can make a significant difference in how the money is taxed over time.

Roll it into their own retirement account. A surviving spouse can roll an inherited 401(k) directly into their own IRA or employer retirement plan. Once that happens, the account is treated as if it were always the surviving spouse’s own. Required minimum distributions do not begin until the surviving spouse turns 73. This is generally the most tax-efficient option for spouses who do not need the money immediately and want to keep it growing tax-deferred.

Keep it in an inherited IRA. A surviving spouse can also transfer the inherited 401(k) into an inherited IRA in their own name. This option allows withdrawals before age 59 and a half without the 10 percent early withdrawal penalty, which matters if the surviving spouse is younger and needs access to funds. Required minimum distributions in this case are based on the surviving spouse’s life expectancy.

Leave it in the plan. If the plan allows it, the surviving spouse can leave the inherited funds in the original 401(k) and take distributions from there. Plan rules vary, so it is worth reviewing what the specific employer plan permits before deciding.

Under a provision added by SECURE Act 2.0, effective in 2024, a surviving spouse can also elect to be treated as the deceased employee for RMD purposes, which may be advantageous for an older surviving spouse inheriting from a younger spouse.

The 10-Year Rule: What Non-Spouse Beneficiaries Need to Understand

If you leave your 401(k) to an adult child, a sibling, a friend, or anyone other than a spouse, the rules are different and the tax implications are significant.

Under the SECURE Act of 2019, most non-spouse beneficiaries who inherit a 401(k) from someone who died after December 31, 2019, must withdraw the entire account balance within 10 years of the account owner’s death. This is called the 10-year rule. The distribution rules under the SECURE Act can require annual required minimum distributions in some circumstances, and the account generally must be fully distributed by the end of the tenth year.

Every dollar withdrawn from a traditional 401(k) is taxable as ordinary income in the year it is received. A child who inherits a $400,000 401(k) and waits until year 10 to withdraw it all will owe income tax on the full $400,000 in that year, potentially pushing themselves into a significantly higher tax bracket. Spreading withdrawals strategically across the 10 years can reduce the tax impact, but it requires planning that most families are not aware of when the inheritance arrives.

There are exceptions to the 10-year rule. Minor children of the account owner, beneficiaries who are disabled or chronically ill, and beneficiaries who are no more than 10 years younger than the deceased account owner can take distributions over their own life expectancy rather than being subject to the 10-year deadline. For minor children of the account owner, the 10-year clock begins once they reach the age of majority.

What Happens If You Never Named a Beneficiary

If no beneficiary is on file with the plan and the account owner had a surviving spouse, federal law generally directs the account to the spouse. If no valid beneficiary is on file, the account is distributed according to the terms of the employer’s plan, which often, but not always, provides that it passes to the estate.

When a 401(k) passes to the estate, it loses the ability to go directly to an individual beneficiary outside of probate. It becomes subject to estate administration, which means delays, potential creditor claims, and the loss of the 10-year inherited IRA option for beneficiaries. The distribution rules can be significantly less favorable than if a designated beneficiary had been named.

It also means the account is now a probate asset, visible in the public record, subject to court oversight, and unavailable to your family until the estate is administered. All of this is avoidable by keeping a current beneficiary designation on file.

The One Thing That Matters Most: Review Your Beneficiary Designations

The single most impactful thing most working families can do for their 401(k) is review who they named as beneficiary and whether that person is still the right choice. This is not a legal document that requires an attorney. It is a form on file with the plan administrator, and most plans allow online updates through the employee portal.

After any major life event, marriage, divorce, the birth of a child, the death of a named beneficiary, or a significant change in your family structure, the beneficiary designation should be reviewed and updated if necessary. An outdated designation is one of the most common and most consequential oversights in estate planning, and it is also one of the easiest to fix while you are alive.

A primary beneficiary receives the account. A contingent beneficiary receives it if the primary beneficiary predeceases the account owner. Naming both is a basic protection that costs nothing and prevents the account from defaulting to the estate if the primary beneficiary is no longer living.

Plan Well. Live Better.

Your 401(k) may be the most valuable thing you leave behind. Making sure it goes to the right person, in the right way, with the least possible tax burden for your family is not complicated. It starts with knowing the rules and keeping your paperwork current. At Milvidskiy Law Group, we help New Jersey families understand how retirement accounts fit into a complete estate plan and what their beneficiaries will face when the time comes. Learn more about how we approach estate administration for the families we serve.

This article is for informational purposes only and does not constitute legal advice or tax advice. Retirement account rules are complex and subject to change. We encourage you to speak with a qualified attorney and a tax professional to discuss your specific situation.