What Happens to Your 401k When You Die: Beneficiary and Tax Rules

When you die, your 401k passes directly to whoever is listed on the beneficiary designation form filed with the plan, not through your will and not through probate. That form controls the outcome even if your will, divorce decree, or other estate documents say something different. What happens next — how quickly the money must come out and how it is taxed — depends on who the beneficiary is and, in some cases, how old you were when you died.

Who Actually Inherits the Account

The beneficiary designation on file with the plan administrator is the controlling document. The Supreme Court has confirmed that plan administrators may rely only on the plan’s terms and the beneficiary designation on file, even when a divorce decree or will says otherwise.¹

A surviving spouse holds the highest priority under ERISA. For most 401k plans, the spouse is automatically entitled to the full balance unless they sign a written waiver giving up that right. Naming a child, sibling, or anyone else as the primary beneficiary requires the spouse’s written consent, generally witnessed by a notary or plan representative.¹

Primary beneficiaries are first in line. Contingent beneficiaries inherit only if every primary beneficiary has already died. If no beneficiary is named, or all named beneficiaries have predeceased the account holder, the plan’s default order applies — typically current spouse first, then children, parents, siblings, and finally the estate.¹ Once the money lands in the estate, it goes through probate and becomes reachable by creditors.

How a Beneficiary Claims the Money

A beneficiary contacts the employer’s HR department or the financial institution running the plan and requests a claim for death benefits form. They will need a certified (not photocopied) death certificate, the deceased’s full legal name and Social Security number, and the plan or account number.

Federal rules give the plan up to 90 days to review the claim and notify the beneficiary of the decision, with one possible 90-day extension if the plan sends written notice of the delay before the first window closes.² Straightforward claims are often processed in about a month; disputed or incomplete ones take longer.

If Your Spouse Inherits

A surviving spouse has three main choices, and unlike other beneficiaries, is not forced to empty the account within ten years.³

Roll the money into their own IRA or 401k. The funds are then treated as if they had always been the spouse’s, with distributions timed to the spouse’s own age and required beginning date. This is often the best fit for a younger spouse who does not need the money right away.
Move the funds into an inherited IRA. Distributions can be spread over the spouse’s life expectancy, and withdrawals before age 59½ escape the usual early withdrawal penalty.⁴
Take the balance as a lump sum. The full amount is added to the spouse’s taxable income for the year, which can produce a large tax bill.

If Someone Other Than Your Spouse Inherits

Under the SECURE Act, most non-spouse beneficiaries must withdraw the entire balance by the end of the tenth calendar year after the year the account holder died.⁴ This is the rule for adult children, siblings, friends, and anyone else who does not qualify for one of the exceptions below.

How the withdrawals are spaced within that decade depends on whether the account holder had reached their required beginning date, currently age 73 for most people.

Died before the required beginning date: no withdrawals are required in years one through nine. The beneficiary can take as much or as little as they want each year, provided the account is empty by the end of year ten.³
Died on or after the required beginning date: annual minimum distributions are required in each of the first nine years using IRS life-expectancy tables, and any remaining balance must be withdrawn by the end of year ten.⁵

Missing a required withdrawal — the year-ten deadline or an annual minimum — triggers an excise tax of 25% of the amount that should have come out. The penalty drops to 10% if the shortfall is corrected within two years.⁶

Beneficiaries Who Escape the Ten-Year Rule

Certain beneficiaries, called eligible designated beneficiaries by the IRS, can stretch withdrawals over their own life expectancy instead. Five categories qualify:⁴

A surviving spouse, with the flexible options described above.
A minor child of the account holder. Life-expectancy distributions run until the child reaches age 21, and the ten-year clock starts then.
A disabled individual, generally someone unable to perform substantial work activity for a period expected to last at least twelve months.
A chronically ill individual, unable to perform at least two activities of daily living without assistance for an indefinite period.
A beneficiary who is not more than ten years younger than the deceased, such as a sibling or close-in-age friend.

An eligible designated beneficiary may take distributions over the longer of their own life expectancy or the deceased’s remaining life expectancy. If the account holder died before their required beginning date, an eligible designated beneficiary can also elect the ten-year rule instead.⁴ The minor-child exception applies only to the account holder’s own children, not to grandchildren, nieces, or nephews.

The Year-of-Death Distribution

If the account holder had already reached the age when required minimum distributions begin and died before taking that year’s distribution, the beneficiary must take the remaining amount for that year. It is the final withdrawal the account holder owed but did not complete.⁴ The plan administrator can supply the exact dollar figure. Missing this distribution carries the same 25% excise tax.⁶

If the Account Is a Roth 401k

A Roth 401k was funded with after-tax dollars, so if the account has been open at least five years, distributions come out federally tax-free, including earnings.³ If the five-year period has not been met, the original contributions still come out tax-free, but the earnings portion is taxable.

The withdrawal timelines are the same as for a traditional 401k. Non-spouse beneficiaries still have ten years; eligible designated beneficiaries can still use the life-expectancy method.³ Because qualified distributions are not taxed, letting the balance grow for the full ten years before withdrawing tends to maximize the benefit.

How Beneficiaries Are Taxed

Distributions from an inherited traditional 401k are taxed as ordinary income in the year received. Federal rates currently range from 10% to 37% depending on total income for the year.⁷ Timing matters. A beneficiary who normally earns $80,000 and inherits a $300,000 traditional 401k will pay far more tax by withdrawing the full amount in one year than by spreading it across several years within the ten-year window.

Any taxable distribution paid directly to a beneficiary rather than rolled to another eligible account is subject to mandatory 20% federal income tax withholding.⁸ That is an advance payment against the total tax bill, refunded or supplemented when the return is filed.

One useful break: the 10% early withdrawal penalty is waived for inherited 401k distributions regardless of the beneficiary’s or the deceased’s age at death.⁹ Regular income tax still applies, but the extra penalty for withdrawals before age 59½ does not.

Naming a Trust Instead of a Person

Some account holders name a trust as beneficiary to keep control over how the money reaches heirs, such as a minor child or a beneficiary with a disability. For the trust to qualify as a look-through trust — allowing withdrawal timelines to track the individual beneficiaries’ life expectancies rather than requiring rapid distribution — it must be valid under state law, its beneficiaries must all be identifiable individuals, it must become irrevocable at the account holder’s death, and the required documentation must reach the plan administrator.

A trust that fails those requirements is treated as no designated beneficiary at all, generally forcing the entire balance out within five years. Because trust-based planning intersects both ERISA and IRS distribution rules, an estate-planning attorney should draft or review the arrangement before the trust is named on the beneficiary form.

1
Department of Labor (DOL). Current Challenges and Best Practices Concerning Beneficiary Designations in Retirement and Life Insurance Plans
2
U.S. Department of Labor. Filing a Claim for Your Retirement Benefits
3
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
4
Internal Revenue Service. Retirement Topics – Beneficiary
5
Internal Revenue Service. Notice 2024-35 – Certain Required Minimum Distributions
6
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
7
Internal Revenue Service. Federal Income Tax Rates and Brackets
8
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
9
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions