What happens to your 401(k) when you die

The beneficiary form beats your will

This is the most-missed fact in the subject, and it costs families more than any tax rule on this page. A 401(k) is not part of your probate estate. It is a contract between you and the plan, and it pays whoever the plan documents say it pays. A carefully drafted will that leaves "all my retirement accounts" to your children does nothing if the form on file at the recordkeeper still names someone else.

The Supreme Court has said so twice, in cases worth knowing about. In Egelhoff v. Egelhoff (2001) it held that ERISA pre-empts state statutes that automatically revoke a beneficiary designation on divorce — so a stale form naming an ex-spouse can still control. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (2009) it went further: even where a divorce decree had the ex-spouse formally waive her interest, the plan administrator was required to pay her, because she was the person named on the form. The plan pays the paperwork.

Two consequences follow. First, divorce, remarriage, a birth or a death in the family does not update your 401(k) — you do. Second, every old plan you left a balance in has its own form, frozen at whatever you wrote at the time; the guide to what happens to a 401(k) after leaving a job covers consolidating them, which is the cleanest way to fix stale designations. Name a contingent beneficiary too — that line is what stands between your family and the estate outcome described further down this page.

If you are considering naming a trust as the beneficiary — for a minor, a spendthrift heir, or a second marriage — that is a separate decision with its own see-through and tax rules, set out in the guide to putting a 401(k) or IRA in a trust.

ERISA gives your spouse a right an IRA does not

If you are married, the beneficiary form is not the last word either. Under ERISA and IRC §401(a)(11), a 401(k) or other defined-contribution plan must pay 100% of the account balance to the surviving spouse on the participant's death. The Department of Labor states it plainly: if you die before receiving your benefits they automatically go to your surviving spouse, and to select a different beneficiary your spouse must consent by signing a waiver, witnessed by a notary or plan representative (DOL/EBSA — What You Should Know About Your Retirement Plan).

The consent has to be real. Under IRC §417(a)(2) it must be in writing, acknowledge the effect of giving up the benefit, identify the specific alternate beneficiary, and be witnessed by a plan representative or a notary public. A verbal agreement does not count, and a prenuptial agreement generally does not either — a person who is not yet a spouse cannot waive a spousal right. A plan may also disregard the rule where the marriage lasted less than the one-year period ending on the date of death. Separately, a qualified domestic relations order can assign a plan benefit to a former spouse and takes priority over the beneficiary form, because it is a court order rather than a designation.

Who gets what: the three outcomes side by side

Almost every 401(k) death lands in one of three buckets, and the gap between them is very wide.

If you are the surviving spouse

You have options nobody else gets, and the default one is usually right. You can roll the balance into your own IRA (or your own employer plan) and treat it as your own money: the inherited-account rules disappear entirely, no 10-year clock starts, and nothing is required until your own RMD age of 73. Over a long widowhood that is normally the cheapest answer by a distance.

The main reason not to do it is age. If you are under 59½ and expect to need the money, keeping the account inherited — left in the plan if the plan permits, or moved by direct rollover into an inherited IRA — preserves penalty-free access to every dollar. Roll it into your own IRA instead and withdrawals before 59½ become subject to the 10% tax like any other. A common sequence is to keep it inherited until 59½ and roll it to your own IRA then.

Three more things worth knowing. If your spouse died before their required beginning date, you can generally delay the first distribution from an inherited account until the year they would have reached RMD age. Since 2024, SECURE 2.0 also lets a sole-beneficiary spouse elect to be treated as the deceased participant for RMD purposes, which uses the gentler Uniform Lifetime Table — useful where the deceased was younger than you. And the plan is not obliged to hold your money indefinitely: many 401(k) plans push beneficiaries out within a set period, so read the plan's beneficiary packet before deciding.

Whatever you choose, move money by direct rollover. A distribution paid to you rather than transferred between institutions carries 20% mandatory federal withholding, and you would have to replace that 20% from your own pocket within 60 days to complete the rollover.

If you are a non-spouse beneficiary

A child, a sibling, a friend, a partner you were not married to — the rules are the same for all of you, and the first one is absolute: you cannot roll an inherited 401(k) into your own IRA. Doing so would be an excess contribution, not a rollover. Your only route out of the plan is a direct trustee-to-trustee transfer into an inherited IRA, titled in the deceased's name for your benefit — a right guaranteed to designated beneficiaries by IRC §402(c)(11). There is no 60-day rollover option. If the plan cuts you a cheque, the entire amount is taxable in that year and the mistake cannot be undone.

Once the money is in an inherited IRA, the ordinary beneficiary rules govern: most individuals are on the 10-year rule, with annual RMDs required in years one through nine if the participant had already reached their required beginning date, and nothing required inside the window if they had not. Eligible designated beneficiaries — a minor child of the participant, someone disabled or chronically ill, or anyone not more than ten years younger than the participant — can still stretch over life expectancy. The full framework, the Single Life Table mechanics and the enforcement history are in the inherited IRA RMD rules guide, and the inherited IRA RMD calculator will give you your regime, your deadline and this year's figure from your own dates.

Two administrative points that only apply in the first year or so. If there are several beneficiaries, separate accounting by December 31 of the year after the death lets each of you use your own life expectancy rather than being pulled onto the oldest beneficiary's. And a beneficiary who does not want the money can execute a qualified disclaimer within nine months of the death, which passes the share to the contingent beneficiary — sometimes the cleanest way to move an inheritance down a generation, but only if you have not already accepted any of it.

If no beneficiary was named

Nothing is left to chance, exactly — but nothing is left to you either. The plan document contains a default order, and it applies whenever there is no valid designation on file. A typical order runs surviving spouse, then children in equal shares, then parents, then siblings, then the estate. Some plans skip straight from spouse to estate. You cannot know which without reading the summary plan description.

If a living relative sits high enough in that order, the outcome is only mildly worse than a proper designation. If the account reaches the estate, it is bad on every axis at once:

• Probate. The money joins the public, slow, fee-bearing process it would otherwise have skipped entirely.
• Creditors. ERISA's anti-alienation protection shields plan assets from claims. Once the balance is paid into the estate, the deceased's general creditors can reach it.
• No inherited IRA. An estate is not a designated beneficiary, so the §402(c)(11) transfer right does not apply. The money has to come out of the plan as cash.
• The fastest payout. With no designated beneficiary, the account must be emptied within five years if the participant died before their required beginning date, or over the participant's own remaining single life expectancy if they died on or after it (26 CFR §1.401(a)(9)-5).
• The worst tax. Five years instead of ten means twice as much income per year, and if the estate itself receives it, compressed trust and estate brackets can apply before anything reaches the heirs.

None of this is hard to avoid. It is one form.

Death removes the 10% penalty at any age

A question that arrives constantly in some form — what happens to my 401(k) if I die before 65? — has a flat answer: nothing about your age matters. The 401(k) death rules make no distinction between dying at 40, at 64 or at 90.

The tax point behind the question is genuinely reassuring. IRC §72(t)(2)(A)(ii) exempts distributions made to a beneficiary on or after the death of the participant from the 10% additional tax on early distributions, and the IRS exceptions table lists death with no age condition attached, for both qualified plans and IRAs. A 30-year-old who inherits a 401(k) from a parent can withdraw the whole balance and owe income tax but no penalty. The plan reports it with code 4 in box 7 of Form 1099-R.

The one way to lose that protection is the spousal rollover described above: a surviving spouse who moves the money into their own IRA converts it into their own retirement account, and the death exception no longer covers it. If you are a widow or widower under 59½, that is the whole decision.

What does depend on age is the deceased's, not yours — whether the participant had reached their required beginning date determines whether beneficiaries owe annual RMDs inside the 10-year window.

An outstanding 401(k) loan at death

Nobody comes after your family for the payments, but the loan is not forgiven either. At death the plan performs a loan offset: it reduces the account by the unpaid principal plus interest accrued to the date of death, and reports that offset amount as a distribution on Form 1099-R. In substance, the estate or beneficiary receives a smaller account and a tax bill for the difference.

Three details matter. The offset is ordinary income to whoever is entitled to the account, in the year of the offset. The 10% early distribution tax does not apply, because the death exception covers it. And the money that was borrowed is gone from the account permanently — a $40,000 loan on a $200,000 balance leaves beneficiaries with $160,000 and tax due on $200,000 worth of distributions across the payout. If you carry a plan loan, that gap is the number a small term policy is for.

A Roth 401(k) at death

A designated Roth account inside a 401(k) behaves differently in one respect and identically in another. Identically: the post-death distribution rules are the same. A non-spouse beneficiary is still on the 10-year rule and still has to move the account by direct transfer, into an inherited Roth IRA rather than a traditional one. The account is not exempt from being emptied.

Differently: the tax. Distributions from a Roth account are tax-free if they are qualified, which needs both a triggering event and a five-taxable-year period. Death is a triggering event, and the beneficiary inherits the participant's clock — it runs from the first year the participant made a designated Roth contribution to that plan, not from the date of death. If the participant died in year three, earnings remain taxable until the fifth year is complete. Note also that a designated Roth account's five-year clock does not carry across to a Roth IRA; where money is rolled to a Roth IRA the receiving account's own five-year period governs, so ask the custodian which clock it is applying before withdrawing earnings.

One more piece of context: since 2024, SECURE 2.0 has removed lifetime RMDs from designated Roth accounts, which brought them into line with Roth IRAs. That change affects the participant while alive. It does not exempt beneficiaries from the post-death rules.

What your heirs actually pay

An inherited 401(k) is one of the few assets that gets no step-up in basis. Pre-tax dollars in the account are income in respect of a decedent under §691: they were never taxed in your lifetime, so they are taxed in your beneficiary's, as ordinary income at their marginal rates, in whatever year each distribution is received. There is no capital gains treatment and no basis reset. The heir who inherits a taxable brokerage account and the heir who inherits the 401(k) are not receiving equal amounts of money, whatever the statements say.

What that means in practice, and where it stings:

• The distribution stacks on the beneficiary's own income. Adult children usually inherit during their peak earning years, which is exactly the wrong decade. The guide to the tax on retirement distributions covers the stacking, bracket effects and the two-year-lagged IRMAA and NIIT thresholds these withdrawals can trip.
• Level the drawdown. Taking nothing for nine years and everything in year ten is the most expensive way to empty a 10-year account. Spreading it evenly usually costs materially less; see planning inside the 10-year window.
• Withholding. Distributions paid to a beneficiary rather than directly transferred are subject to 20% mandatory federal withholding — often less than the eventual bill.
• Estate tax is a separate question. The account is included in your gross estate, but the federal basic exclusion amount is $15,000,000 per person for decedents dying in 2026 (IRS, Rev. Proc. 2025-32), so it is not the issue for most families. State estate and inheritance taxes have much lower thresholds and are.
• If federal estate tax was paid on the account, the beneficiary can claim an income tax deduction under §691(c) for the estate tax attributable to that income. It is routinely missed. IRS Publication 559 sets it out.

One exception worth naming: if your 401(k) holds appreciated employer stock, the net unrealised appreciation rules survive death, and a lump-sum distribution in kind can convert most of the gain to long-term capital gain. It is narrow and easy to blow, but it is worth pricing before a beneficiary rolls the whole balance out.

What to do — on both sides of the death

While you are alive, this is a twenty-minute job. Log in to every plan you still have a balance in, including old employers, and confirm the primary and contingent beneficiaries by name. If you are married and want anyone other than your spouse to receive the account, obtain a witnessed spousal consent — a will cannot do it and a prenup almost certainly cannot either. Re-check after every marriage, birth or death — and especially after a divorce, when the split itself and the stale beneficiary form are two separate problems. If you have inherited an account, name your own successor on it too; what a successor beneficiary gets is not what you got. Then tell your executor where the plans are; unclaimed 401(k) balances are a large and entirely avoidable problem.

If you have just inherited one, do these in order, and do not take a distribution before step four:

1. Notify the plan administrator and request the beneficiary packet plus a copy of the summary plan description. You need the plan's own payout deadline, not just the tax code's.
2. Establish your category — spouse, eligible designated beneficiary, other individual, or estate — and find out whether the participant had reached their required beginning date.
3. Check the year-of-death RMD. If the participant was already taking RMDs and had not finished for the year, the remainder must still come out and is reported on the beneficiary's return.
4. Move the money by direct transfer, not by cheque — to your own IRA if you are the spouse and that suits you, otherwise to an inherited IRA, ideally by December 31 of the year after the death.
5. Plan the drawdown across the whole window rather than year by year, and get the schedule from the inherited IRA RMD calculator before you commit.

Investment risk note: the balances discussed here remain invested through the payout period and can fall as well as rise, so the amounts a beneficiary eventually receives are not fixed by anything on this page. Distribution rules are federal; probate, state estate and inheritance taxes, and community-property spousal rights vary by state. Confirm your own facts with the plan administrator and a qualified adviser before acting.