For many Americans, a 401(k) is the foundation of their retirement planning. The goal is to set aside sufficient tax-deferred dollars (ideally, with matching employer contributions) to see you through from the date of retirement to the date of your death. But what happens if you die before you have a chance to spend your 401(k) funds? You certainly can’t take it with you when you go.
After your death, those funds will be transferred to your named beneficiaries. If your primary beneficiary does not survive you, the funds will go to your successor or alternate beneficiaries, in the specified order. If you have no surviving beneficiaries, your 401(k) funds will become part of your estate and distributed according to your will.
If you are married, under federal law, you must obtain the consent of your spouse in writing and file the consent form with your 401(k) provider if you want to name someone else as your beneficiary. This law is in place to protect the interests of spouses. If you were previously married and named your spouse as your 401(k) beneficiary, your ex will receive your 401(k) funds in the event of your death, even if you are divorced, unless you change your beneficiary. Some states require spousal consent to change your beneficiary, even after divorce. If you live in such a state, without your former spouse’s consent, you may need a court order to change the beneficiary on your 401(k).
If your spouse is named as the primary beneficiary on your 401(k), in the event of your death, he or she has the option to leave the 401(k) funds where they are in your name or to roll them over into a new or existing retirement account in your spouse’s name. If your 401(k) is left intact and remains in your name, it is subject to the legal minimum distribution requirements, beginning the year you would have reached age 70 ½.
Your named beneficiary should have access to your 401(k) funds after your death without going through probate. However, the funds are treated as part of your taxable estate. Your beneficiary will be required to pay income tax on the amount received, in addition to any estate taxes for larger estates. The 401(k) funds will likely be distributed to your beneficiary in one lump sum, which is subject to state and federal income tax. However, your beneficiary will not be required to pay the 10% early withdrawal penalty to the IRS, even if he or she is under the age of 59 ½, and you were also under 59 ½ at the time of your death.
A 401(k) can be an important part of your estate planning, as well as your retirement planning. Our knowledgeable agent will be happy to answer any questions you have.