How to Choose a 401(k) Beneficiary: Rules & Options
Choosing a 401(k) beneficiary ensures that 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.
Key Points
• It is essential to choose a primary beneficiary for a 401(k) to make sure funds in the account are distributed according to the account holder’s wishes.
• Naming a beneficiary for a 401(k) avoids having the account go through probate, which can be a lengthy and costly process.
• A spousal waiver may be required if someone other than a spouse is named as a 401(k) beneficiary.
• Beneficiary designations should be updated regularly, especially after significant life changes like marriage, the birth of a child, and divorce.
• Beneficiaries should be informed about 401(k) account details and how to access account information.
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 beneficiary.
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 take months, potentially delaying the distribution of the assets.
Some plans with unnamed beneficiaries automatically default to a surviving spouse, while 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 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, you ensure your heirs receive the funds in full. For example, this is important if you weren’t legally married but want to insure that your domestic partner is your legal beneficiary. A beneficiary designation is currently required in order for your domestic partner to inherit your 401(k).
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.
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 primary beneficiary and a contingent beneficiary.
• Your primary beneficiary is the main person you want to receive your 401(k) assets when you die.
• The 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.
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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 if you wish, 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) may 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. (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 your 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 you need to be at least age 59 ½ in order to avoid the 10% early withdrawal penalty.
Because the terms governing inherited 401(k) are so complex, it may be wise to consult a financial professional.
Recommended: Rollover IRA vs. Traditional IRA: What’s the Difference?
What to Do After Naming Beneficiaries
Once you’ve selected one or more beneficiaries, 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, especially since 401(k) accounts can be distributed outside of probate, making the process potentially 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 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
You also need to inform beneficiaries about the pace at which the funds must be dispersed after your death.
Thanks to the terms in the SECURE Act (Setting Every Community Up for Retirement Enhancement), 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 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
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.
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 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 roll over your 401(k) into an IRA, 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
• Social Security number (this may or may not be required)
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. 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.
It’s true that you will likely use your 401(k) funds yourself, for your retirement. But because an inherited 401(k) can be a significant asset, beneficiaries will likely face certain income and/or tax consequences when they inherit it. Thus, it’s best to inform the people whom you’re choosing.
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.
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