What Happens to a 401(k) When You Die: Beneficiary Rules and Taxes

Your 401(k) passes by beneficiary designation, not your will

A 401(k) account transfers to whoever you named on your beneficiary designation form, regardless of what your will says — this is one of the most common estate-planning mistakes, since people update their will but forget the separate form on file with their plan administrator. If no beneficiary is on file, the account typically passes according to the plan's default order, often the estate itself, which can trigger a slower, more expensive probate process and worse tax outcomes.

Review your beneficiary designations any time your life changes — marriage, divorce, a new child, or a beneficiary's death — since the form on file controls, not your will or any verbal wishes. See our estate planning calculator for how beneficiary designations fit into your broader plan.

If your spouse is the beneficiary

A surviving spouse has the most flexibility of any 401(k) beneficiary. They can roll the inherited 401(k) into their own IRA or 401(k), treating it as if it were their own account — which means using their own life expectancy for future required withdrawals and, if they're not yet 59½, potentially delaying withdrawals longer than a non-spouse beneficiary could.

Alternatively, a spouse can keep the account as an inherited (beneficiary) account rather than rolling it over, which can matter if they're under 59½ and might need penalty-free access to the funds before that age — inherited-account withdrawals avoid the 10% early-withdrawal penalty that would normally apply to their own accounts.

The SECURE Act's 10-year rule for most other beneficiaries

Most non-spouse beneficiaries — adult children, other relatives, friends — must empty an inherited 401(k) within 10 years of the original owner's death, under the SECURE Act, passed in 2019. This replaced the older "stretch" rule that let beneficiaries spread withdrawals over their own life expectancy, often for decades.

A detail many beneficiaries miss: if the original account owner had already started their required minimum distributions before death, the IRS generally also requires the beneficiary to take annual withdrawals during the 10-year window, not just one lump sum at the end. Missing a required annual withdrawal can trigger an IRS excise tax on the amount that should have been withdrawn, so beneficiaries in this situation should confirm the exact requirement with the plan administrator or a tax professional early, not in year nine.

Who still gets the longer "stretch" option

A small group of beneficiaries, called eligible designated beneficiaries, can still stretch withdrawals over their own life expectancy instead of the 10-year rule: a surviving spouse, a minor child of the account owner (until they reach the age of majority, at which point the 10-year clock starts), a beneficiary who is disabled or chronically ill under the IRS's definition, and a beneficiary who is not more than 10 years younger than the original owner.

This distinction matters most for a young beneficiary who could otherwise stretch withdrawals — and their tax bill — over many decades rather than compressing them into a single 10-year window.

How taxes work on an inherited 401(k)

Withdrawals from an inherited traditional 401(k) are taxed as ordinary income to the beneficiary in the year they're taken, the same as they would have been for the original owner. A beneficiary in a high tax bracket who takes a large lump-sum withdrawal in one year can push themselves into an even higher bracket for that year, so spreading withdrawals across the 10-year window — rather than waiting until year 10 to take everything at once — often reduces the total tax bill.

An inherited Roth 401(k) works differently: qualified withdrawals are generally tax-free to the beneficiary, since the original owner already paid tax on the contributions. The same 10-year (or life-expectancy, for eligible designated beneficiaries) withdrawal timeline still applies, even though the money itself isn't taxed on the way out.

What a beneficiary needs to do

Contact the plan administrator directly and provide a certified death certificate to begin the claims process — the administrator, not the beneficiary's own bank, handles the actual transfer. The beneficiary then chooses how to receive the funds within the plan's and the IRS's rules: a lump sum, a rollover into an inherited IRA that preserves the tax-deferred status while the 10-year or life-expectancy clock runs, or scheduled withdrawals.

Mark the 10-year deadline (or the annual withdrawal requirement, if it applies) on a calendar immediately — the IRS excise tax for missing a required withdrawal is a real, avoidable cost, and plan administrators do not always send reminders as the deadline approaches.

Tips for account owners naming a beneficiary

Always name a contingent (backup) beneficiary, not just a primary one — if your primary beneficiary has already died and no contingent is on file, the account can default to your estate, dragging it into probate and losing the direct-transfer tax treatment described above. Never leave the beneficiary field blank or write "my estate" on purpose; naming an individual almost always produces a better outcome for them.

Naming a trust as beneficiary is sometimes useful — for a minor child who can't legally receive a large lump sum, or a special-needs dependent who could lose means-tested benefits if they inherit directly — but it's a specialist drafting job. A poorly drafted trust beneficiary designation can accidentally force a faster payout than the 10-year rule would otherwise allow. Coordinate any trust-as-beneficiary decision with your estate planning documents, not the 401(k) form in isolation.

Frequently asked questions