Planning what happens to your 401(k) when you die is likely not at the top of your to-do list. While that’s certainly understandable, a little foresight can go a long way in making things easier for the people who matter most to you.
Here’s what you need to know to ensure your 401(k) account stays secure and ends up in the right hands.
Who Gets Your 401(k)?
Your 401(k) doesn’t automatically go to just anyone — it goes to the beneficiaries you’ve listed on the account. Think of it as a way to pass along your savings directly, avoiding unnecessary red tape.
There are a few things to keep in mind:
Primary Beneficiaries
The people who will inherit your 401(k) first. Most often, this includes a spouse or children.
Contingent Beneficiaries
These individuals inherit only if your primary beneficiaries aren’t around. So, if you outlive your primary beneficiary, this designation makes sure your 401(k) is still handled according to your wishes.
Keeping these designations current is critical. If there’s been a change in your family structure, like a divorce, marriage, or the birth of a new child, updating your beneficiaries helps avoid disputes and keeps your plan on track.
When you name beneficiaries, you’re helping your loved ones avoid probate — a costly, time-consuming legal process that can hold up their access to your 401(k) funds. By naming specific people, the account transfers directly to them without court involvement.
You’ll be simplifying things for those you leave behind. If you don’t name beneficiaries or list your “estate” as the beneficiary, probate becomes unavoidable.
What Are the 401(k) Rules for Spouses and Non-Spouses?
When it comes to passing on your 401(k), the rules vary depending on who inherits it. A spouse may have more flexible options, while non-spousal beneficiaries, like children or friends, face different guidelines. Here’s a clear breakdown of each.
For a Spouse
If your spouse is the beneficiary, they have several choices for managing the 401(k) funds. Each option comes with specific requirements and potential tax implications:
Leave the Account in Your Name
Your spouse can choose to keep the account as is, though they’ll need to start taking Required Minimum Distributions (RMDs) based on their own age. This allows the funds to stay in the 401(k), providing continued tax-deferred growth.
Roll It Into Their Own Retirement Account
By moving the 401(k) into their own retirement account, your spouse can combine funds, simplifying management and potentially allowing for better control. However, if they choose a Roth IRA, they’ll need to pay taxes on the conversion, so this decision requires careful planning.
Transfer into an Inherited IRA
Transferring the 401(k) funds into an inherited IRA allows your spouse to withdraw without early penalty, even if they’re younger than 59½. This flexibility can be useful, particularly if they’re not ready to retire but need access to some of the funds.
Take a Lump-Sum Distribution
If your spouse needs immediate access, they can withdraw the entire balance at once. While this provides full access, it also means that the entire amount will be subject to income tax for that year, which could increase their taxable income significantly.
For Non-Spouse Beneficiaries
Non-spousal beneficiaries, like children, relatives, or friends, have their own set of rules, especially since the SECURE Act changed how inherited 401(k) funds are handled.
Here’s what they need to know:
10-Year Rule for Withdrawals
Non-spousal beneficiaries now have a 10-year window to empty the 401(k). They aren’t required to take annual distributions, but the full balance must be distributed by the end of the tenth year. If any funds remain in the account after this period, they may face a hefty 50% penalty.
Transfer to an Inherited IRA
Like a spouse, a non-spousal beneficiary can roll the 401(k) into an inherited IRA. However, they must still follow the 10-year rule. This option allows some flexibility in timing withdrawals but doesn’t extend the distribution period.
Lump-Sum Distribution
A non-spousal beneficiary can also choose to take a lump sum, giving them immediate access to all funds. However, the amount will be taxed as ordinary income, which could push them into a higher tax bracket for that year.
What Are Some Common Pitfalls in Beneficiary Designations?
Updating your 401(k) beneficiary designations isn’t a one-and-done task. Situations change, and so should your beneficiary choices. Here are some points to watch out for:
Don’t Name Your Estate as a Beneficiary
This opens the door to probate, which can take time and cost money. Thankfully, both are avoidable with a little planning.
Make Sure Your Beneficiaries Reflect Major Life Events
Marriage, divorce, and new family members mean it’s worth checking and updating your beneficiaries. An outdated designation can lead to conflicts and unwanted consequences.
Clarify Percentages for Multiple Beneficiaries
If you want to leave your 401(k) to more than one person, specify exact percentages that total 100%. This keeps the transfer smooth and minimizes potential disagreements.
What Is a Per Stirpes Designation?
If you want to ensure that a portion of your 401(k) passes down to your beneficiaries’ descendants in the event they pass before you, consider a Per Stirpes designation. This allows, for example, your child’s portion to go to their children (your grandchildren) if your child is no longer living. It’s a way to keep things in the family while keeping your intentions clear.
What To Know About a Gold IRA and Your 401(k)
While 401(k) accounts are common for retirement savings, they aren’t the only option. Many people now consider the benefits of a Gold IRA, especially those looking to shift from traditional bank-backed reserves to something tangible and less volatile.
With a Gold IRA, you’re choosing to place your retirement savings into physical gold instead of relying on the stock market. American Hartford Gold specializes in helping clients set up Gold IRAs. We provide peace of mind in knowing that your assets are grounded in physical precious metals.
Unlike stocks or digital assets, a Gold IRA offers something you can see and hold, and that’s a hedge against financial uncertainty. So, while a Gold IRA won’t replace your 401(k), it adds another layer of security to your retirement plan. It’s a way to diversify and protect your assets without depending solely on the performance of traditional markets.
AHG Stands Ready To Guide You
Planning what happens to your 401(k) when you die may not be the most thrilling task, but it is a necessary one. And by considering options like a Gold IRA, you can ensure that your hard-earned savings end up in the right place without a lot of red tape.
With a bit of attention now, you’re laying a path that provides clarity and avoids costly delays. And ultimately, you’ll make things a lot easier for your family. Reach out to American Hartford Gold today at American Hartford Gold to discuss a precious metals IRA to fortify your financial future.
Sources:
Be Smart in Naming Beneficiaries of Your 401(k) | Investopedia
Inherited 401(k): What to know if you’re a 401(k) beneficiary | Fidelity
SECURE 2.0 Act changes affect how businesses complete Forms W-2 | Internal Revenue Service
