Retirement plan decisions made easy
Drill Down: How Your Beneficiary Gets Your 401k
There are two possible cases: Your 401k goes to your spouse or it passes to someone else.
If you’ve chosen your spouse as your beneficiary, or if you named no other beneficiary and thus your 401k passed to your spouse automatically, then he or she gets the 401k with all of the tax advantages intact.
The federal government sets some of the rules for your 401k plan, but your employer writes more specific rules that fit within the IRS guidelines. That means you may or may not receive all of the nice advantages the IRS allows. For example, while the IRS may allow spouses to keep their money in 401k plans for a while, your specific plan may not. Your plan might say to the grieving widow, “Take your money and go.” Make certain that you read the paperwork for your own 401k plan.
If your spouse is the one getting the money, he or she will be able to roll the funds over into an Individual Retirement Account. This is great, because it defers the tax bill until the spouse actually withdraws money. Although the spouse will have to withdraw money according to a different minimum distribution schedule than what a couple uses, that is really only a minor issue. If this happens, the surviving spouse should read both Chapter 6 on Rollovers and the plan documents. Then he or she should select a good company to provide the IRA, and let that company handle the rollover. The surviving spouse should not take the cash and then move it into an IRA.
For beneficiaries who are not the spouse, such as sons or daughters, it’s even more important to check the plan’s rules because such beneficiaries cannot roll the 401k money over into an IRA. The plan, however, may allow for payments over time. This will spread out the tax bill over many years and thereby allow the money to continue to grow with tax deferral. Even though the IRS allows distributions to beneficiaries over a period of years, many plans do not. Because of the administrative costs, those employers don’t want to be bothered making payments over a number of years. They may require the beneficiary to take the cash in a lump sum.
This is another good reason for a retired person to roll the 401k into an IRA. Then there’s no doubt that the beneficiaries can take the money out on a long schedule, over as many years as the IRS allows.
Please close this window to return to the main lesson page.
You are not logged in. Log in or create an account.
Click here to sign up for our monthly newsletter delivered via email.
Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
» Lesson 8: Death and Divorce
Lesson 9: Your 401k, Your Other Assets, and Your Life
The 401k ebook is available in text, audio, and video formats. The current selected format is video. You may also switch to the audio or text formats by clicking on the icons at the top of the main lesson page.