When you first opened a 401(k), you may have overlooked the importance of naming a beneficiary: the person or entity who will inherit the account when you die. But it’s an important task. If you die without naming a beneficiary (or beneficiaries), your 401(k) will likely end up in probate court. This is often an expensive, slow way to distribute assets—and it’s not something your grieving heirs want to deal with.
In this guide, we’ll take you through what you need to know to ensure that your assets are passed on as you would like.
Key Takeaways
- When you enroll in a 401(k), you need to name beneficiaries to inherit your 401(k) if you die.
- Naming beneficiaries can keep your 401(k) out of probate court.
- You can name almost anyone as your beneficiary. such as your children, your parents, siblings, a friend, or your favorite charity.
- If you are married, your spouse is assumed to be your beneficiary. You will need their permission to designate a different primary beneficiary.
- If you have minor children, they can’t inherit your 401(k) directly, so you may need to establish a trust.
Understanding 401(k) Beneficiaries
When you enroll in a 401(k), or move one from a previous employer, you’ll likely be asked to name beneficiaries. These are the people or entities (like a trust or a charity) who would inherit the 401(k) if you pass away. You’ll be asked to name two types of beneficiaries:
Primary Beneficiary: This is your first choice to inherit your 401(k). If you’re married, your primary beneficiary is presumed to be your spouse unless you specify otherwise and your spouse agrees in writing.
Contingent Beneficiaries: These are one or more backup beneficiaries who will receive your 401(k) if your primary beneficiary dies before you or with you, or declines to accept the inheritance.
You can name multiple people and/or entities in each category, so you can split your inheritance between, say, your spouse and children. The amounts don’t have to be even but they do have to add up to 100%. For example, you could specify that 80% of the assets in your 401(k) should go to your spouse and the remaining 20% should go to charity.
Important
The beneficiary designations for your 401(k) accounts override any instructions for their disposition that you make in your will.
How to Choose 401(k) Beneficiaries
Depending on your personal situation, there are different rules to be aware of when naming a beneficiary.
If You Are Single
If you are single, you can name almost any person or entity as your beneficiary. Just make sure to review your designations periodically and keep them current. If you designate your parents, for example, and they pass away, you should update your beneficiaries as soon as possible.
As designated beneficiaries, most of these heirs will have two options for handling the inheritance: either transfer the assets to an inherited individual retirement account (IRA) or disclaim the account.
If your heirs transfer the money to an inherited IRA, they must generally withdraw all of it (and pay taxes on it) by the end of 10 years. If they elect to disclaim the account, they must do so within nine months.
Note that there are several exceptions to these timetables. A person who is classified as an eligible designated beneficiary can take distributions over their life expectancy, rather than within 10 years. In addition to a surviving spouse, individuals in this category include the account owner’s child who is under age 18, a disabled or chronically ill individual, or any other beneficiary who is not more than 10 years younger than the deceased account owner.
If You Are Married
If you are married, your spouse is assumed to be your primary beneficiary. If you haven’t designated a beneficiary, they will receive 100% of your 401(k) when you pass away.
It’s possible to pass on your 401(k) to someone other than your spouse, in whole or in part, but you will generally need your spouse’s permission to do so, in the form of a signed and notarized spousal waiver.
Your spouse has a wider range of options if they inherit your 401(k), including delaying taking required minimum distributions (RMDs) until their own required beginning date for taking distributions.
If You Have Children
If you want to name your children as primary beneficiaries of your 401(k), you can, assuming that your spouse agrees. Otherwise, you can name your children as secondary beneficiaries. However, if they are minors, they cannot inherit your 401(k) directly. A guardian must be provided to oversee the use of the funds (or the court will appoint one).
Setting up a trust in the children’s names with the help of an attorney is another possible solution. A trust gives you some control over when the children will have access to the money. The Uniform Transfers to Minors Act (UTMA) governs this process in most states and controls how a designated custodian will manage the assets until the children are old enough to take over.
How Do You Change a 401(k) Beneficiary?
You can change the beneficiary by filling out and submitting the appropriate form. Your employer or plan administrator can supply the form you need. You may be able to complete it online.
What Happens If a 401(k) Beneficiary Doesn’t Make Withdrawals Within 10 Years?
If the beneficiary of your 401(k) is required to withdraw all of the money within 10 years and fails to do so, they may be subject to a 25% excise tax on the remaining balance. This may be reduced to 10% if the account is emptied within two years.
Can a Pet Inherit Your 401(k)?
Your pet cannot inherit your retirement account. However, you can provide for your pets by leaving an adequate amount of money for their care to someone you choose. You can also establish a pet trust.
The Bottom Line
Naming beneficiaries—and reviewing them periodically and updating them as needed—gives you control over how your assets will be distributed after you die. It also keeps your 401(k) out of a potentially time-consuming and costly probate court process. Even if you have a will, naming 401(k) beneficiaries can make the inheritance process much quicker and less expensive.
So if you’ve not already named a beneficiary for your 401(k), don’t delay. Make sure you take care of it soon.