What Happens to a 401(k) If You Die Before or Retire?


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As you grow older, you may start to think about your estate plan a lot more than you used to. And as you move closer to retirement age, you probably give more thought to your 401(k) plan established through your employer or those you have collected over the years. After all, your long-term plan may likely include the intention of retiring and ultimately using your 401(k) savings for said retirement.

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However, what you may not have considered very closely is what happens to your 401(k) plan when you die either before or after retirement. If you haven’t considered this — especially since January 1, 2020, when the federal law governing the payout of retirement plan benefits changed — then you ought to consider it now. 

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Beneficiaries and 401(k)s Explained

The federal law governing 401(k) retirement plans is designed to encourage people to use their retirement savings for retirement when they are likely to need financial savings the most.

Under a traditional 401(k) plan, you may not make penalty-free withdrawals from your plan until you are age 59 and a half. You do not have to take withdrawals at that time, but you can. You must begin withdrawing funds from your 401(k) every year by the time you reach age 72. This is referred to as your required minimum distribution (RMD).

When you pass away, either before or after retirement, the funds in your 401(k) account will be transferred to whomever you name as the beneficiary of your plan benefits. 

Choosing beneficiaries

When you participate in a 401(k) retirement plan, you should name a beneficiary to receive your benefits when you die. If you are married, federal law requires that your spouse receive the benefits under your plan. However, if you are single, the beneficiary you name in your plan will inherit your benefits upon your death.

If you die and have not named a beneficiary for your plan benefits, or if the beneficiary you named has predeceased you and you have not named an alternate beneficiary, then the benefits under your plan will pass to your estate and will be probated with the rest of your property. Your benefits will either pass to your heirs (if you do not have a will) or they will pass to the beneficiary designated in your will to receive those benefits.

Tax consequences for beneficiaries

One of the advantages of a 401(k) retirement plan is that taxes on the money invested in the plan are deferred. This means that as long as the funds are invested and remain in the plan, you will delay your obligation to pay taxes on that income until after you retire and start withdrawing money from the plan.

Likewise, if you die and you have named a beneficiary of your plan benefits, your beneficiary will enjoy deferred taxes on that income until they begin withdrawing funds from the plan. If your spouse is the beneficiary of your plan, your spouse may roll-over the benefits into their own retirement savings plan and continue enjoying the tax-deferred status of that income.

Because you or your beneficiary will be taxed on the amount of income you withdraw from the plan each year, the amount you withdraw will affect your tax bracket and the amount of tax you have to pay on that income. So it is to your advantage to minimize the amount of income you withdraw every year so as to stretch out the tax-deferred benefits of your plan for as many years as possible.

This is why it makes financial sense to name a beneficiary who was young and had a long life expectancy. Their annual required minimum distributions (RMDs) would be lower and their tax-deferred savings would last longer.

However, these tax advantages were affected by the mandates of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which took effect on January 1, 2020. Now, your beneficiary is required to withdraw all of the funds in the plan within 10 years of your death.

Your beneficiary is no longer able to stretch out the tax-deferred benefits of the plan for the expectancy of their life. As a result, they will suffer the tax consequences of a complete withdrawal of funds much sooner than they otherwise would have before the SECURE Act was enacted.  

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What Happens to Your 401(k) If You Die Before You Retire?

If you are married, your spouse will receive the benefits of your 401(k) plan, as required by federal law. However, if you die before retirement, the benefits of your plan will be distributed to the beneficiary you name in your plan to inherit your benefits upon your death.

If you die before retirement and did not name a beneficiary under your plan to receive your plan benefits, or if the beneficiary you named has already died before you and you have not named an alternate beneficiary, then your plan benefits become part of your estate when you die and will pass through probate with the other assets in your estate. In this case, your plan benefits will pass either:

  • To any beneficiary you name (if you have a will); or
  • To your heirs (if you do not have a will). 

Therefore, if you have not named a beneficiary of your 401(k) and you die before retirement, your retirement benefits could be distributed to someone whom you never intended to benefit from your retirement plan. To avoid this when you die before retirement, be sure that you name a beneficiary of your 401(k) either in your plan or in your will.  

What Happens to Your 401(k) If You Die After You Retire?

When you die after retirement, at a time when your 401(k) benefits are already being distributed, the beneficiary you name in your plan will inherit your 401(k). This is called an “inherited 401(k).” Traditionally, your beneficiary could receive plan benefits over the course of their life expectancy. However, the SECURE Act made some significant changes to how 401(k) plans can be distributed when you die.

The Act put restrictions on who can “stretch” out the withdrawal period for an inherited 401(k). Some beneficiaries are no longer required to take RMDs every year, but they are required to withdraw all funds in their inherited retirement account within ten years of the original account owner’s death.

Depending on how much money is in the retirement account, being required to withdraw all the funds and, therefore, to be taxed on all the funds within just ten years, can result in a hefty tax burden for your beneficiary.

Beneficiaries who are not subject to SECURE Act’s 10-year withdrawal requirement include:

  • A surviving spouse
  • Any beneficiary named who is disabled
  • Any beneficiary named who is chronically ill
  • Any beneficiary who is not more than ten years younger than the plan participant
  • The plan participant’s minor children who are named as beneficiaries (until the minor children become adults, at which time the 10-year withdrawal requirement is imposed)

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Consider How Your Death May Affect Your 401(k) Plan

Before January 1, 2020, passing your 401(k) retirement benefits to your surviving spouse or other named beneficiary was considered an effective way to achieve long-term tax deferment in your estate plan. With the enactment of the SECURE Act, however, certain beneficiaries you name to receive the benefits of your 401(k) plan are required to withdraw all of their inherited 401(k) distributions within ten years. 

Make sure to let your beneficiaries know what their rights are when you designate them as such in your 401(k).

To be sure you are providing maximum tax benefit options to the persons you want to benefit from your 401(k) retirement account, you should carefully consider with your attorney or estate planner the best way to ensure that your retirement plan benefits the person you want to benefit after you die.  

If you're looking for more help with estate planning, read our guides on if you need a will and the best online will makers.

Post-planning tip: If you are the executor for a deceased loved one, handling their unfinished business and other tasks like this can be overwhelming without a way to organize your process. We have a post-loss checklist that will help you ensure that your loved one's family, estate, and other affairs are taken care of.


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