Choosing a 401(k) beneficiary ensures that any unused 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 options.
Why It’s Important to Name 401(k) Beneficiaries
If you die without a beneficiary listed on your 401(k) account, the distribution of the account may have to go through the probate process. While some plans with unnamed beneficiaries automatically default to a surviving spouse, others 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 can last months. Another downside of having your 401(k) go to probate instead of being directly inherited by a beneficiary is that the account funds could be used to pay off creditors. By naming a 401(k) beneficiary, you ensure your heirs receive the funds in full.
Having named 401(k) beneficiaries is a decision that overrides anything written in your will, as well as court orders, so it’s important to stay on top of this administrative task.
What to Consider When Choosing a Beneficiary
Your 401(k) may house 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 your children as beneficiaries.
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 remaining 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 must also choose a contingent beneficiary. This individual only receives your 401(k) funds if the primary beneficiary passes away. If the primary beneficiary is still alive, the contingent beneficiary doesn’t receive any funds.
401(k) Beneficiary Rules and Restrictions
Really, an individual can choose anyone they want to be a 401(k) beneficiary, with a few limitations. There are only a few restrictions and requirements on who may be named a beneficiary.
• 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 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 may vary based on what you use during your lifetime and investment performance.
However, also consider how the funds will be taxed for each individual . Spouse and non-spouse beneficiaries have different rules for an inherited 401(k). Spouses usually have more options available, but they differ depending on the spouse’s age and your age at the time of passing. In many cases, the spouse may roll over the funds into a specific spousal or inherited IRA.
Non-spouse beneficiaries may face higher tax consequences, but may be able to extend or stretch any required distributions over their life span to reduce their taxable income. They can also take out the money as a lump sum, which will be subject to income tax, but not the 10% early withdrawal penalty.
What to Do After Naming Beneficiaries
Once you’ve selected one or more beneficiaries, take the following steps to notify your heirs and to 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, especially since 401(k) accounts can be distributed outside of probate, making the process much faster than other elements of your estate plan.
For all of your accounts, including a 401(k), it’s a good idea to keep a list of financial institutions and account numbers. This makes it easier for your beneficiaries to access the funds quickly after your death. Plus, there may be rules on the pace at which the funds must be dispersed after your death—in some cases, your beneficiary may need to spread out withdrawals of the entire account over the 10 years following your death.
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
Before you get married, you may decide to list a parent or sibling as your beneficiary. But you’ll likely want to update that to your spouse or domestic partner, should you have one. At a certain point, you may also wish to add your children, especially once they reach adulthood and can be named as direct beneficiaries.
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 spouse 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 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 over the years. While it is possible to borrow from your 401(k), this can 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 try to streamline multiple 401(k) accounts as you change jobs and open new employer-sponsored plans. There are several ways to rollover your 401(k), which makes it easier for you to track and update your beneficiaries. It also simplifies things for your heirs after you pass away, because they don’t have to track down multiple accounts.
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
• Potentially their 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.
A financial plan at any age should include how to distribute your assets should you pass away. The best way to manage your 401(k) is to formally name one or more beneficiaries on the account. This helps speed up the process by avoiding probate.
A named beneficiary trumps anything stated in your will. That’s why it’s so important to regularly review these designations to make sure the right people are identified to inherit your 401(k) assets.
Another step to consider is a 401(k) rollover, where you move funds from an old 401(k) into a rollover IRA. This can help you keep track of your funds and plan for the future.
SoFi makes the rollover process straightforward — the process is handled automatically so there’s no need to watch the mail for your 401(k) check. There are no rollover fees or taxes, and it’s possible to complete your 401(k) rollover without a lot of time or hassle.
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