Inherited 401(k) Rules: A Guide for Beneficiaries

The death of a loved one can make your life feel chaotic. However, you can take solace in knowing that your loved ones have planned for the road ahead by making you the beneficiary of their employer-sponsored 401(k) plan. If you’ve inherited a 401(k) plan, you may wonder how to navigate the beneficiary rules.

While planning your next steps may seem like a daunting task, we’re here to guide you through the inheritance process, so you can breathe a sigh of relief.

What is an inherited 401k?

As part of their financial planning, individuals name beneficiaries to each of their accounts as part of end-of-life planning. This means that 401(k) plan participants can leave their account to a spouse, relative, or friend in the event of their death. If you were named the beneficiary, you will now need to manage an inherited 401(k).

What should you do when you inherit a 401k) account?

When you inherit a 401(k) account, you’ll first need to consider your relationship with the deceased to best assess your options.

Spouses

• Roll funds to your own 401(k) or IRA – As the spouse of the deceased and beneficiary of the account, you may roll the funds over into your own existing 401(k). You will need to begin required minimum distributions (RMDs) when you reach age 73.If your spouse was under the age of 73 at the time of their death and you didn’t roll their 401(k) over into your existing account, you won’t have to make RMDs until the year that your spouse would have turned 73.
• Transfer the money to an inherited (or beneficiary) IRA – This can be a traditional or Roth IRA, based on the tax treatment of the original account.
• Withdraw the funds – For spouses, there is no penalty for withdrawing money before the age of 59 ½. You’ll still need to pay normal income taxes on the amount of the withdrawal.
• Disclaiming the 401(k) – This involves forfeiting the funds and passing the money on to a new beneficiary.*

Friends or Family

If you are not the spouse of the original account owner, then you may be a parent, friend, child, sibling, etc. However, if you’re not the spouse of the deceased, your options are limited.

• Disclaim the 401(k) account – You have nine months after the original owner’s death to disclaim the 401(k). You may not have received any proceeds from the account if you wish to disclaim.*
• Eligible Designated Beneficiary (EDB) options – Eligible Designated Beneficiaries are minor children of the participant, individuals who are chronically ill or permanently disabled, or individuals who are not more than 10 years younger than the participant.
  • You may transfer assets to an Inherited IRA.
    • Using the life expectancy method, RMDs are required to begin no later than December 31st of the year following the death of the participant and are based on the beneficiary’s single life expectancy. (Note that special rules apply to minor child beneficiaries)
    • Using the 10-year method, all assets must be fully distributed by the 12/31 of the tenth year after the participant died.
  • You may take a lump sum distribution. The distribution is subject to taxation, but not subject to the 10% early withdrawal penalty.
• Designated Beneficiary options – Designated beneficiaries are named beneficiaries but do not qualify as an EDB.
  • You may transfer assets to an Inherited IRA. The 10-year rule applies, meaning the account must be fully distributed to the beneficiary by the end of the tenth year following the date of death.
• You may take a lump sum distribution. The distribution is subject to taxation, but not subject to the 10% early withdrawal penalty.

If you know that you’re the beneficiary of a loved one’s 401(k) account, it can be helpful to explore your options ahead of time. For any questions regarding inherited 401(k)s, reach out to our support team.

*NOTE: The ePlan Services document does not contain disclaimer language. Therefore, if the beneficiary disclaims the account, the Plan Sponsor will need to complete a Direction and Indemnification Agreement (prepared by our Legal Department).

This content is for educational purposes only, is not intended to provide specific legal or financial advice, and should not be used as a substitute for the legal advice of a qualified attorney or financial professional. The information may not reflect the most current legal developments, may be changed without notice, and is not guaranteed to be complete, correct, or up to date.