How Does Your 401(k) Work After Death?

 We are all mortal, and we shall all pass away at some point. There is a 100% possibility that this will occur, whether or not we have retired. Over 25% of all Americans, according to Vanguard, have a 401(k) plan.

Accordingly, 1 in 4 Americans will have to deal with a 401(k) plan when a loved one passes away. This brings us to the crucial query:

• What occurs to our 401(k) when we pass away?

How Does Your 401(k) Work After Death?

The restrictions of your specific 401k plan, the type of plan you have, and whether you have any beneficiaries named all affect what happens to your account after you pass away.

Your 401(k) beneficiaries will get the money in the account after your death if you have named them as such. The funds will be dispersed in accordance with the 401k plan's guidelines. The money in your 401(k) will become part of your estate and be distributed in accordance with the terms of your will if you haven't named any beneficiaries.

When the funds in your traditional 401(k) plan are distributed to your beneficiaries, they will be subject to income tax. If you have a Roth 401k plan, no taxes will be due when the funds are distributed to your beneficiaries.

What Happens to Your 401 K If You Pass Away Prior to Retirement?

Your 401(k) assets will be allocated to your beneficiaries in accordance with the conditions of the plan if you pass away before reaching retirement age. When the funds in your typical 401(k) plan are given to your beneficiaries, they will be subject to income tax. If you have a Roth 401k, the same guidelines still apply.

A rollover of the 401(k) assets into an inherited IRA could also be started by them. The chosen beneficiary may maintain the funds in the account and draw required minimum distributions (RMDs) in accordance with his or her own life expectancy under an inherited IRA, according to Fidelity.

Remember that your beneficiaries won't be able to continue making contributions to the account if you pass away before retiring. They won't be able to benefit from any employer-matching contributions that you might have been eligible for.

Knowledge of 401(k) Beneficiaries

If you have a 401(k), you can name a beneficiary to receive the funds after your passing. You may designate many beneficiaries, and you may alter your selection of beneficiaries at any time.

Your children are often the contingent beneficiaries and your spouse the principal beneficiary, however, this is not always the case. You are free to choose your parents, siblings, friends, or a nonprofit organization as beneficiaries.

Internal Revenue Service regulations govern 401(k) beneficiaries. The IRS states that if you pass away before receiving your total interest, your specified beneficiary or beneficiaries will receive the remaining amount in accordance with the provisions of your plan.

When Will the 401k Plan Be Transferred?

The restrictions of the specific 401k plan in question, as well as the financial institution you're working with, will determine when the distribution is made. For instance, the process was simple for clients whose 401(k) plans were with Fidelity or Vanguard.

The money was moved far more slowly for some of my other clients, in one example taking over 6 months, whose 401k plan was via their workplace.

What You Should Do

Choosing a primary and secondary beneficiary for your 401(k) is a smart idea (and all your other accounts for that matter). When you open the account, you must specify the beneficiary (or beneficiaries), and you can alter them at any moment.

The money in your 401(k) will become part of your estate and be distributed in accordance with the terms of your will if you don't designate a beneficiary, which may not be what you want.

Mistaken 401k Beneficiary - IRL Example

I have seen numerous instances of tragic things that happen in life that are so horrible that you would never imagine them happening to you, but they do.

Although the 401k is the last thing on our minds, not thinking about it might have negative financial and emotional effects. Here's one instance that still makes my heart ache:

Despite having only been married for a short while, the young couple was planning to start a family soon. Before he met his wife, the husband started working and had amassed a respectable nest fund in his 401(k), especially for someone his age.

He tragically passed away at work in a bizarre accident, leaving his family in shock. You would assume that because he and his wife were remarried, his whole 401k would go to her.

Not exactly.

This young guy had designated both of his parents as beneficiaries on the 401k since he began working before getting married. After getting married, his parents' beneficiary form for his new wife wasn't updated with much thinking.

People will do insane things for money.

Although I can't be sure, I believe the husband would have wanted his wife to get a portion of his 401(k). Maybe it's all of it. However, the parents decided they would keep all of the money and not give any to their daughter-in-law based on their own reasoning. That is one illustration of the need of amending your 401(k) beneficiary documents.

What happens when you distribute money from your 401(k) to your spouse?

Another customer went through a similar tragedy, but it turned out very differently. After abruptly losing her husband of more than 20 years, the woman came to see me.

He washed the car that morning, which was a typical Saturday pastime. A few hours later, he was found dead after an unanticipated major heart attack in their bedroom. He wasn't even 55.

His 401k was significantly larger than the young man from the previous story because he was much older and a physician. Imagine how disastrous things would have been if his parents—or anyone else, for that matter—had been the 401(k) plan beneficiary.

Fortunately, it wasn't the situation. And since he had taken the time to accurately complete all the beneficiary paperwork, he had properly listed both his wife as the primary beneficiary and his two children as the dependent beneficiaries. His wife received his 401(k) through a smooth transfer.

Even while it's unpleasant to consider what will happen to our 401(k) accounts after we pass away, the reality is that many individuals do pass away before they reach retirement age.

The Social Security Administration estimates that 1 in 4 people in their 20s will become incapacitated before retiring and 1 in 8 will pass away before turning 67.

Consider a Trust

The funds in your 401(k) plan may be given to the trust's beneficiaries if you have a trust. The provisions of the trust will determine the guidelines for how the money is allocated.

The "A" trust and the "B" trust, which make up an A/B trust, are each given a portion of the trust's assets. The "A" trust is not subject to taxes when the surviving spouse passes away because it is for their benefit. When the surviving spouse passes away, taxes are due on the "B" trust, which is for the benefit of the children or other beneficiaries.

Affected by the SECURE Act Changes

After the SECURE Act was approved in 2019, there were certain modifications made to how 401(k)s are dispersed to beneficiaries.

It used to be possible to create something known as a "Stretch IRA." This implied that your beneficiaries could withdraw funds from your IRA at any time during their lives. This gave the money years of tax-deferred growth.

The SECURE Act prohibits this going forward. Most inheriting beneficiaries are now required to take distributions from their 401(k)s within ten years of the account owner's passing.

To this rule, there are several exceptions. The spouse of the beneficiary may still receive payouts during their lifespan. Additionally, a minor kid who is the beneficiary may receive dividends throughout their lifespan until they reach the age of majority (18 or 21, depending on the state).

Beneficiaries who are less than 10 years younger than the account holder and those who are incapacitated or chronically ill are also exempt.

FAQs about What Happens to Your 401(k) After Death

After a divorce, what happens to my 401(k)?

Your 401(k) will be distributed to your beneficiaries in accordance with the terms of the plan if you are divorced and pass away prior to reaching the age of 7012. When the funds in your typical 401(k) plan are given to your beneficiaries, they will be subject to income tax. If you have a Roth 401k, the same guidelines still apply.

How would I proceed if my 401(k) plan has no beneficiaries?

The money in your 401(k) will become part of your estate and be distributed in accordance with the terms of your will if you don't designate any beneficiaries for it.

If I pass away, can my creditors seize my 401k?

The money in your 401k cannot be taken by creditors after your death, no. Your 401(k) funds are shielded from creditors.

By designating a specific beneficiary for the account, you can shield your 401(k) from creditors. The money in the account won't be included in your estate and won't be accessible to creditors if you do this.

When I pass away without a will, what happens to my 401k?

Your 401(k) will be given to your heirs in accordance with the laws of intestate succession if you pass away without leaving a will. If you pass away without leaving a will, your possessions will be dispersed according to the intestate succession order. In general, the list goes as follows: spouse, kids, parents, siblings, etc.