When completing the paperwork for your 401(k), it's essential that you list your desired beneficiaries and that the information you provide is correct. Otherwise, if you die suddenly, the wrong people may inherit your money as opposed to the people you want to benefit from your financial success.
What's more, you can't assume that, if your beneficiary forms are missing or incomplete, your will ensures that your children will get the money in your pension, 401(k) or individual retirement account (IRA) after your death. It's far better to take the actions needed to ensure that your assets, including your 401(k), are distributed to your child or another beneficiary as you want them to be.
The 401(k) Child Beneficiary
To ensure children receive a parent's 401(k) assets, information regarding those beneficiaries must be up to date and the assets must have provisions for naming them. If you're married, but want to name your child as a beneficiary for your 401(k) assets, it's likely that you'll need the written consent of your spouse.
No Rollover Option for Children
While your spouse has the option to roll a deceased partner's retirement plan assets into her own IRA, your children will not have that option. In general, the child is a non-spouse beneficiary who may be required to begin to take required minimum distributions (RMDs) soon after your death and pay the taxes on those distributions. Alternatively, the child might have the option to remove the assets from the 401(k) and place them in an inherited IRA.
An inherited IRA account is in the name of the individual who inherits the 401(k) or employer-sponsored retirement plan and is the recipient of the funds in the 401(k) of the deceased parent. Your child will be unable to add assets to the inherited IRA account, so it simply serves as a holding account until your child depletes the account via required minimum distributions.
401(k) Tax-Deferred Benefit Is Lost
As non-spouse beneficiaries, your children aren't allowed to preserve the tax deferral of your 401(k) account by transferring it to an IRA. Instead, your children will be required to begin making withdrawals from the 401(k) account or inherited IRA immediately. Alternatively, they may be required to withdraw the entire amount in one year.
In addition, upon your children's receipt of your 401(k) retirement plan assets via your federally taxable estate, they'll incur an estate tax liability when you die.
Inherited 401(k) Distribution
As a beneficiary of a parent's 401(k), a child has options depending on the age of the deceased parent:
Parent's Age Was 72 Or More
If you die after you've attained the required minimum distribution (RMD) age of 72, and had received some distributions prior to your death, the child will receive the required minimum distributions, or more, after your death.
The child receives the RMDs over the period of the deceased parent's life expectancy, or her own, whichever is the longer period.
Parent's Age Was Less Than 72
As of 2020, if you die before your 72nd birthday, your 401(k) plan allows for either or both of the following:
The child must receive all money in the plan within five years of December 31 of the year of the parent's death. This approach allows the child to vary the withdrawal amounts, which might allow her to withdraw the majority of the money in a year when she's taxed at a relatively low rate. Alternatively, the plan might allow the child to receive the plan's required minimum distribution according to her own IRS life expectancy.
While it's likely that a 401(k) account owner will withdraw some assets from the account before her death, there may be cash in the account for its owner's beneficiaries. If you inherit a 401(k), your handling of the accounts assets must be guided by IRS rules, including the required minimum distribution rules and those that apply to non-spouse beneficiaries.
- Internal Revenue Service: Retirement Topics — Required Minimum Distributions (RMDs
- Internal Revenue Service: Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs) - What if You Inherit an IRA?
- Internal Revenue Service: Publication 590-B (2019), Distributions From Individual Retirement Arrangements (IRAs)
- Fidelity Investments: Inheriting IRAs from someone other than your spouse
- Internal Revenue Service: Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs) - Five-Year Rule
- Fidelity.com: Inherited IRA
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.