What Happens to Your Pension When You Die: Heirs and Taxes

What happens to your pension when you die depends on the kind of plan you have, the payout option you chose, and who you named as beneficiary. For a 401(k), 403(b), or IRA, the remaining account balance passes to the named beneficiary. For a traditional defined benefit pension, monthly income may continue to a surviving spouse, shrink to a smaller percentage, or stop entirely, based on an election often made years before death. Federal law makes a surviving spouse the default beneficiary in most covered plans unless the spouse signed a written waiver.¹

If You Have a 401(k), 403(b), or IRA

These are defined contribution accounts. They hold a specific cash balance, and that balance transfers to the person you named. If you’re married and the plan is covered by federal retirement law, your spouse is automatically the beneficiary unless they previously signed a written waiver giving up that right.¹

A surviving spouse has the widest set of choices. They can take a lump sum, move the funds into an inherited IRA, or roll the account into their own IRA and treat it as if it had always been theirs.² Rolling it in lets the spouse delay withdrawals until they reach the age when required minimum distributions begin, currently 73.³

A non-spouse beneficiary, such as a child, sibling, or friend, inherits the balance but cannot roll it into their own IRA or treat it as their own. They can take a lump sum, or they can move the money into an inherited IRA, where withdrawals are governed by the 10-year rule described below.²

If You Have a Defined Benefit Pension

Traditional pensions pay monthly income rather than a lump balance. What continues after your death depends on the payout form you elected.

Joint and Survivor Annuity

Federal law requires that married participants in covered plans receive their benefits as a joint and survivor annuity unless both spouses agree in writing to a different arrangement. Under this default, you receive a monthly payment during your life, and after your death your surviving spouse continues receiving a percentage of that payment, no less than 50% and no more than 100% of the joint-life amount.⁴ The plan must also offer a qualified optional survivor annuity at either 75% or 50%, depending on the default percentage.

The trade-off is a lower monthly check during your lifetime. A plan that would pay a $2,000 single-life benefit might pay $1,600 under a joint and 50% survivor version while both spouses are alive, dropping to $800 after the pensioner dies. Knowing the exact survivor percentage in your plan matters for long-term budgeting.

Single Life Annuity

A single life annuity pays a higher monthly amount but stops completely at your death. Your spouse receives nothing. A married participant can elect this option only if the spouse consents in writing, with the signature witnessed by a plan representative or a notary public.⁴ The election is irrevocable once payments begin.

If You Die Before Retiring

If a vested participant dies before reaching retirement age, the plan must provide a qualified pre-retirement survivor annuity to the surviving spouse.⁴ The spouse receives monthly income even though the participant never began collecting. Some plans also include a period-certain guarantee, which pays for a set number of years regardless of when death occurs; if the guarantee hasn’t expired, payments continue to the beneficiary until it does.

The 10-Year Rule for Non-Spouse Beneficiaries

The SECURE Act of 2019 changed how long most non-spouse beneficiaries can stretch inherited retirement account withdrawals. Most non-spouse beneficiaries must now withdraw the entire account balance within 10 years of the account holder’s death.⁵ A narrow group of “eligible designated beneficiaries” is exempt and can still stretch distributions over their own life expectancy:

A surviving spouse, who can also roll the account into their own IRA or delay withdrawals until the deceased would have reached age 73.
A minor child of the account holder, who stretches until reaching the age of majority, at which point the 10-year clock starts.
A disabled or chronically ill individual.
Any person not more than 10 years younger than the deceased.

These categories are defined under federal tax law and apply to both employer-sponsored plans and IRAs.²

There’s an important wrinkle. If the original account holder died on or after the date they were required to start taking minimum distributions, beneficiaries subject to the 10-year rule must also take annual withdrawals during years one through nine. Waiting until year 10 to empty the account isn’t allowed.⁶ If the account holder died before that required beginning date, the beneficiary has more flexibility to time withdrawals, though the balance still has to be gone by the end of year 10.

Taxes Your Beneficiary Will Owe

Distributions from inherited retirement accounts funded with pre-tax contributions are fully taxable as ordinary income in the year the beneficiary receives them. This covers most 401(k)s, traditional IRAs, and defined benefit pensions. If the account holder made after-tax contributions, a portion of each distribution representing those contributions comes back tax-free.⁷

Inherited Roth IRAs and Roth 401(k)s work differently. Withdrawals of contributions are always tax-free. Withdrawals of earnings are also tax-free as long as the Roth account was open at least five years before the original owner’s death; if it was younger than that, earnings may be subject to income tax.²

The plan administrator reports distributions on Form 1099-R, using distribution code 4 to indicate a payment made because of the account holder’s death.⁸

Federal estate tax is a separate question. For 2026 it applies only when the total value of the deceased person’s assets, retirement accounts included, exceeds $15,000,000.⁹ Most families fall below this threshold. In estates that cross it, beneficiaries may owe both estate tax and income tax on withdrawals.

Beneficiaries who are required to take a minimum distribution and fail to withdraw the full amount owe a 25% excise tax on the shortfall. That penalty drops to 10% if the missed distribution is corrected within two years.⁵

If You Didn’t Name a Beneficiary

When an account holder dies without a valid beneficiary designation on file, the plan’s governing documents decide who receives the funds. Most plans use a default order: surviving spouse first, then children in equal shares, then the account holder’s estate. When funds pass through the estate rather than directly to a named beneficiary, they go through probate, which delays access and adds administrative cost.

The tax consequences are worse too. An estate is not a “designated beneficiary” under federal tax law, so the longer distribution periods, including the 10-year rule, don’t apply. The entire account generally has to be distributed within five years of the account holder’s death.⁶ Keeping your beneficiary designation current is one of the simplest ways to protect your family from unnecessary taxes and delays.

How Divorce Affects Who Inherits

A court can issue a qualified domestic relations order (QDRO) assigning part or all of a pension’s survivor benefit to a former spouse.¹⁰ The QDRO can name the former spouse as the “surviving spouse” for purposes of the joint and survivor annuity, meaning the former spouse rather than a current spouse would receive payments after your death.¹¹

If a QDRO divides the pension into separate interests, the former spouse’s share and survivor benefits are calculated independently. Under a shared-payment arrangement, the former spouse receives a portion of each check during your life and may also be designated to receive the survivor annuity. If you remarry, review any existing QDRO; the former spouse’s rights under a valid order generally take priority. Where no QDRO exists and you elected a joint and survivor annuity with your former spouse before the divorce, that former spouse may retain survivor rights unless the plan documents and a new spousal waiver change the outcome.

If the Pension Plan Itself Fails

If a defined benefit pension runs out of money or the sponsoring company goes bankrupt, the Pension Benefit Guaranty Corporation (PBGC) steps in and continues paying benefits up to a guaranteed maximum. For 2026, the maximum monthly guarantee for a single-employer plan is $7,789.77 for someone starting benefits at age 65 under a straight-life annuity, or $7,010.79 under a joint and 50% survivor annuity.¹² The guarantee is lower if benefits start before age 65.

These guarantees cover survivor annuities on the same terms. If you elected a joint and survivor annuity before the plan failed, your spouse’s portion is protected up to the same caps. Multiemployer plans, often union-sponsored, have a separate and significantly lower PBGC guarantee. PBGC does not cover government pensions, church plans, or plans for professional-service employers with fewer than 26 employees. Federal employees fall under the Federal Employees Retirement System, which has its own survivor benefit structure.¹³

1
U.S. Department of Labor. FAQs About Retirement Plans and ERISA
2
Internal Revenue Service. Retirement Topics – Beneficiary
3
Internal Revenue Service. Retirement Topics – Required Minimum Distributions
4
Office of the Law Revision Counsel. 29 USC 1055 – Requirement of Joint and Survivor Annuity and Preretirement Survivor Annuity
5
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
6
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
7
Internal Revenue Service. Topic No. 410, Pensions and Annuities
8
Internal Revenue Service. Instructions for Forms 1099-R and 5498
9
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
10
Office of the Law Revision Counsel. 29 USC 1056 – Form and Payment of Benefits
11
Pension Benefit Guaranty Corporation. Qualified Domestic Relations Orders and PBGC
12
Pension Benefit Guaranty Corporation. Maximum Monthly Guarantee Tables
13
eCFR. 5 CFR Part 843 – Federal Employees Retirement System Death Benefits and Employee Refunds