About 401k Beneficiaries

About 401k Beneficiaries
About 401k Beneficiaries

Considerations

Under federal law, your spouse is the automatic beneficiary of your 401k. Even if you designate someone else as your beneficiary when you open a 401k account, your spouse will be the beneficiary unless he or she signs a waiver. If you remarry, your new spouse is the beneficiary. This is especially important to consider if you want your children to be your beneficiaries. Without a signed waiver, you cannot exempt your spouse from receiving the proceeds of your 401k.

Function

Beneficiaries usually receive the proceeds of a 401k without having to go through probate (a process by which a court determines how an inheritance is dispersed). If estate taxes are due on the 401k, they must be paid before a beneficiary receives any proceeds. Each 401k plan has is own distribution rules so you'll want to study yours carefully.

Features

A spouse who takes a lump sum 401k distribution may roll over the proceeds into her own IRA. She avoids paying taxes on the inheritance until she makes withdrawals. A nonspouse who takes a lump sum will owe state and local as well as federal income taxes on the distribution. While a nonspouse is not allowed to roll a 401k inheritance into his own IRA, he may be able to roll it into an inherited IRA distribution account and delay paying taxes until he makes withdrawals (see Resources).

Time Frame

If the 401k plan allows a beneficiary to take distributions over time, the tax consequences may be mitigated substantially. Some plans allow a beneficiary to spread payments over her lifetime based on her life expectancy. Other plans give the beneficiary the choice of either lifetime payments or payments within a specified number of years.

Types

If the owner of a 401k account designates multiple beneficiaries, he assigns a percentage of the proceeds to each beneficiary. Additionally, the plan holder may specify an individual who will inherit the 401k in the event of the primary beneficiary's death. The names of beneficiaries on a 401k should be reviewed regularly especially when a life change such as a birth or remarriage occurs.