How to Choose a 401(k) Beneficiary: Rules & Options

Choosing a 401(k) beneficiary ensures that the funds in your account are dispersed according to your wishes after you pass away. Whether you’re married, single, or in a domestic partnership, naming a beneficiary simplifies the estate process and makes it easier for your heirs to receive the money.

There’s room on 401(k) beneficiary forms for both a primary and contingent beneficiary. Before making any decisions on a beneficiary and a backup, it can help to familiarize yourself with 401(k) beneficiary rules and 401(k) beneficiary options.

Why It’s Important to Name 401(k) Beneficiaries

A 401(k) account is a non-probate asset. That means it doesn’t have to go through the lengthy probate legal process of distributing your property and assets when you die — as long as you name a retirement account beneficiary for your 401(k).

However, if you die without a beneficiary listed on your 401(k) account, the account may have to go through probate, which can be costly and lengthy, potentially delaying the distribution of the assets.

Many plans with unnamed beneficiaries automatically default to a surviving spouse, but some do not. If that’s the case — or if there is no surviving spouse — the 401(k) account becomes part of the estate that goes through probate as part of the will review.

The amount of time it will take for your heirs to go through the probate process varies depending on the state and the complexity of your assets. At a minimum, it may last months.

Another downside of having a 401(k) go to probate instead of being directly inherited by a beneficiary is that the account funds may be used to pay off creditors if the deceased had unpaid debts that can be covered by the estate.

By naming a 401(k) beneficiary when you manage your 401(k), you ensure your heirs receive the funds in full.

Having named 401(k) beneficiaries is a decision that overrides anything written in your will, so it’s important to review your beneficiaries every few years or even annually to make sure your money goes to the person you choose.

Recommended: How to Max Out Your 401(k)

What to Consider When Choosing a Beneficiary

Your 401(k) account may hold a substantial amount of your retirement savings. How you approach choosing a 401(k) beneficiary depends on your personal situation. For married individuals, it’s common to choose a spouse. Some people choose to name a domestic partner or their children as beneficiaries.

Typically, you can choose a 401(k) primary beneficiary and a 401(k) contingent beneficiary.

•   Your primary beneficiary is the main person you want to receive your 401(k) assets when you die.

•   The 401(k) contingent beneficiary (aka the secondary beneficiary) will inherit the assets if your primary beneficiary can’t or won’t.

Another option is to choose multiple beneficiaries, like multiple children or siblings. In this scenario, you can either elect for all beneficiaries to receive equal portions of your 401(k) account, or assign each individual different percentages.

For example, you could allocate 25% to each of four children, or you could choose to leave 50% to one child, 25% to another, and 12.5% to the other two.

In addition to choosing a primary beneficiary, you can also choose a contingent beneficiary, as noted above. This individual only receives your 401(k) funds if the primary beneficiary passes away or disclaims their rights to the account. If the primary beneficiary is still alive, the contingent beneficiary doesn’t receive any funds.

401(k) Beneficiary Rules and Restrictions

Essentially, an individual can choose anyone they want to be a 401(k) beneficiary, with a few limitations.

•   Minor children cannot be direct beneficiaries. They must have a named guardian oversee the inherited funds on their behalf, which will be chosen by a court if not specifically named. Choosing a reliable guardian helps to ensure the children’s inheritance is managed well until they reach adulthood.

•   A waiver may be required if someone other than a spouse is designated. Accounts that are ruled by the Employee Retirement Income Security Act (ERISA) have 401(k) spouse beneficiary rules. A spousal waiver, signed by your spouse, is required if you designate less than 50% of your account to your spouse. Your plan administrator can tell you whether or not this rule applies to your specific 401(k).

How to Name Multiple 401(k) Beneficiaries

You are allowed to have multiple 401(k) beneficiaries, both for a single account and across multiple accounts. You must name them for each account, which gives you flexibility in how you want to pass on those funds.

When naming multiple beneficiaries, it’s common practice to divide the account by percentage, since the dollar amounts in the account may vary based on what you use during your lifetime and investment performance.

Complex Rules for Inherited 401(k)s

You may also want to consider how the rules for an inherited 401(k) might affect a beneficiary who is your spouse vs. a non-spousal beneficiary.

Spouses usually have more options available, but they differ depending on the spouse’s age, as well as the year the account holder died.

In many cases, the spouse may roll over the funds into their own IRA, sometimes called an inherited IRA. Non-spouses don’t have that option. If the account holder died in 2020 or later, a non-spouse beneficiary must withdraw all the funds from the account within 10 years, with certain exceptions. (If the account holder died in 2019 or earlier, different rules apply, including taking withdrawals over five years and emptying the account in that time, or taking distributions based on the beneficiary’s own life expectancy beginning the end of the year following the account holder’s year of death.)

A beneficiary can also take out the money as a lump sum, which will be subject to ordinary income tax. But they need to be at least age 59 ½ in order to avoid the 10% early withdrawal penalty.

Because the rules governing an inherited 401(k) are so complex, including 401(k) tax rules, it may be wise to consult a financial professional.

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What to Do After Naming Beneficiaries

Once you’ve selected one or more beneficiaries, you can take the following steps to notify your heirs and continually review and update your decisions as you move through various life stages.

Inform Your Beneficiaries

Naming your beneficiaries on your 401(k) plan makes sure your wishes are legally upheld. But you’ll make the inheritance process easier by telling your beneficiaries about your accounts. They’ll need to know where and how to access the account funds.

For all of your accounts, including a 401(k), it’s a good idea to keep a list of financial institutions and account numbers that you leave for your heirs. This makes it easier for your beneficiaries to access the funds quickly after your death.

Impact of the SECURE Act

It can also be helpful to inform beneficiaries about the pace at which the funds must be dispersed after your death.

Thanks to the terms in the SECURE Act, if an account holder died in 2020 or later, beneficiaries generally must withdraw all assets from an inherited 401(k) account within 10 years of the original account holder’s death. Some beneficiaries are generally excluded from this requirement, including:

•   Surviving spouses

•   Minor children

•   Disabled or chronically ill beneficiaries

•   Beneficiaries who are less than 10 years younger than the original account holder

Again, the rules regarding inherited 401(k)s are complex, so your beneficiaries may wish to consult a financial professional about withdrawing the funds.

Revise After Major Life Changes

Managing your 401(k) beneficiaries isn’t necessarily a one-time task. It’s important to regularly review and update your decisions, especially as major life events occur. The most common events include marriage, divorce, birth, and death.

Common Life Stages

When you’re starting out in your career, you may decide to list a parent or sibling as your 401(k) beneficiary designation. But you’ll likely want to update that to your spouse or domestic partner later, should you have one. At a certain point, you may also wish to add any children you have, especially once they reach adulthood and can be named as direct beneficiaries.

Divorce

It’s particularly important to update your named beneficiaries if you go through a divorce. If you don’t revise your 401(k) account, your ex-spouse could end up receiving those benefits — even if your will has been changed.

Death of a Beneficiary

Should your primary beneficiary die before you do, your contingent beneficiary will receive your 401(k) funds if you pass away. Any time a major death happens in your family, take the time to see how that impacts your own estate planning wishes. If your spouse passes away, for instance, you may wish to name your children as beneficiaries.

Second Marriages and Blended Families

Also note that the spousal rules apply for second marriages as well, whether following divorce or death of your first spouse. Your 401(k) automatically goes to your spouse if no other beneficiary is named. And if you assign them less than 50%, you’ll need that signed spousal waiver.

Financial planning for blended families takes thought and communication, especially if you remarry later in life and want some or all of your assets to go to your children.

Manage Your Account Well

Keep your 401(k) beneficiaries in mind as you manage your account and make 401(k) contributions over the years.

For example, while it is possible to borrow from your 401(k), this could cause issues if you pass away with an outstanding balance. The loan principal will likely be deducted from your estate, which can limit how much your heirs actually receive.

Also, you might want to streamline multiple 401(k) accounts as you change jobs and open new employer-sponsored plans. There are several ways to roll over your 401(k) into an IRA, which makes it easier to track and update your beneficiaries.

A rollover also simplifies things for your heirs after you pass away, because they don’t have to track down multiple accounts. For example, if an individual rolled over their 401(k) into an IRA like a SoFi IRA, there would be just one account for the heirs to deal with.

How to Update 401(k) Beneficiaries

Check with your 401(k) plan administrator to find out how to update your beneficiary information. Usually you’ll need to just fill out a form or log into your online retirement account.

Typically, you need the following information for each beneficiary:

•   Type of beneficiary

•   Full name

•   Birth date

•   Social Security number

Although your named beneficiaries on the account supersede anything written in your will, it’s still smart to update that document as well. This can help circumvent legal challenges for your heirs after you pass away.

The Takeaway

A financial plan at any age should include how to distribute your assets should you pass away. To manage your 401(k), you can formally name one or more beneficiaries on the account. This helps avoid probate.

A named beneficiary supersedes anything stated in your will. That’s why it’s important to regularly review these designations to make sure the right people are identified to inherit your 401(k) assets.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

FAQ

Who should I name as the beneficiary of my 401(k)?

Naming a 401(k) beneficiary is a personal decision. As you’re considering who to name, it may be helpful to think about your situation — such as whether you are married and if you have children. And remember: You can name more than one beneficiary and divide the assets between them in any way that you wish should you choose to do so. Just keep in mind that if you are married, your spouse is often required to be named the beneficiary of the 401(k) unless they sign a spousal waiver allowing you to name someone else as beneficiary for more than 50% of the assets.

When should I update my 401(k) beneficiary?

Updating a 401(k) beneficiary is important after life events such as marriage, divorce, the birth of a child, and the death of the beneficiary. Keeping your beneficiary designation updated will help ensure your 401(k) is inherited by the heirs you wish to have it.

What are common beneficiary mistakes?

Common beneficiary mistakes include not naming a contingent beneficiary and forgetting to update your beneficiary after life events such as marriage or divorce. If you fail to name a contingent beneficiary and your primary beneficiary passes away before you, the 401(k) assets become part of your estate and must go through the lengthy and costly probate process. Not changing your beneficiary after an important life event means that the 401(k) will go to the outdated beneficiary, trumping whatever is written in your will.