Can My 401(k) Be Rolled Over to the Kids Upon My Death?

Your 401k plan allows you to put aside a portion of your pre-tax income each pay period for your retirement. Ordinarily, you cannot withdraw 401k funds prior to turning 59 1/2 without being charged penalties. If you die, your heirs may receive all your 401k funds at once. This is taxable income, and it cannot be rolled over into another 401k unless the beneficiary was married to you at the time of your death.

Distribution of Benefits

When you die, your 401k funds immediately go to your beneficiary. In most cases, the 401k distributes all your benefits to your beneficiary, and he must pay taxes on them. However, your kids will not be responsible for the 10 percent early withdrawal penalty if they receive the benefits before the 59 1/2th anniversary of your birth or before they reach that age. Most 401k plans do not allow your children to roll over the 401k funds once they receive them.

Spousal Exception

If you leave your 401k to your spouse rather than to your children, your spouse can roll the funds over into a traditional IRA. Your spouse must contact your plan sponsor and ask him to directly roll over the funds as soon as she is notified of your death. If the 401k plan administrator distributes the funds to her instead, the administrator must take out 20 percent of the total for taxes, and, as a result, she will have less money to roll over into her retirement account.

Periodic Payments

If you were already receiving periodic distributions from your 401k at the time of your death, your kids may be able to receive payments according to the same pay schedule rather than receiving a lump sum distribution. This would help ease the tax burden on them, although they still will not be able to roll the funds over. If you were not receiving payments at the time of your death, some plans allow your beneficiary to set up a periodic payment schedule.

Time Limit

If your kids benefit from your 401k plan after your death, they must begin receiving periodic or lump sum payments from the 401k by the end of the year following your death. If your plan allows them to set up periodic payments, they may use either a five-year plan or a lifetime expectancy plan. In any case, they have to begin paying taxes on the benefits as soon as they receive their first payment.