What happens to your 401(k) when you die?

If you die before reaching retirement, your 401(k) doesn't simply vanish. The funds you’ve saved remain part of your financial legacy. What exactly happens to your 401(k) when you die — before or during retirement — depends on whether you've named a designated beneficiary on your plan or not. If you have, the 401(k) will typically pass directly to that person or entity, avoiding probate in most cases.

It’s an important reminder that death can occur at any stage in life, which makes naming and updating your 401(k) beneficiaries an important part of long-term financial planning. While the exact distribution rules vary based on who inherits the account, and whether the 401(k) is traditional or Roth, the funds remain accessible to your heirs.

If you die without naming a beneficiary for your 401(k), things can get more complicated. Instead of the funds going directly to a designated person, your 401(k) becomes part of your estate. This usually means the account will go through probate, a legal process that can delay access to your retirement savings.

In many cases, your spouse may still inherit the money, especially if you were married at the time of death. If not, the courts usually decide who receives your 401(k), based on state law. That’s why it’s important to keep your beneficiaries up to date. Without one, your heirs may have limited options for withdrawing the funds, which can affect taxes and timing. Most will need to take the full distribution within 10 years — also known as the 10-year rule.

While the question of what happens to your 401(k) when you die may not be something you think about right away, naming a beneficiary ensures your 401(k) money goes where you want, quickly and with fewer complications. 

A beneficiary is the person or entity you choose to receive the money from your 401(k) after your death. You usually name your beneficiaries when you first enroll in your 401(k) plan, but you can update them at any time. This might be especially relevant after major life changes such as marriage, divorce, or the birth of a child.

You can name a beneficiary by filling out a form through your plan provider, often available online or through your HR department. This ensures your 401(k) funds go directly to the people you choose. This way, it’s possible to avoid probate and give your beneficiaries more control over how they receive the 401(k) distribution after death.

You’re allowed to name more than one beneficiary and assign percentages to each, as long as the total equals 100 %.

Common types of 401(k) beneficiaries include:

• Spouse

• Child or children

• Other family members

• Friends

• A trust

• A charitable organization or nonprofit

• Your estate

Important to know: A spouse is often the default beneficiary unless they waive that right in writing, and naming your estate as beneficiary usually triggers probate, which can delay access to the funds.

When you pass away, the person or entity listed as your 401(k) beneficiary will have access to the funds in your account, but what they can do with that money depends on a few important factors.

The options for handling a 401(k) upon death vary based on whether the beneficiary is your spouse or someone else, like a child, relative, or friend. Each group is subject to different rules, including timelines for withdrawals and possible tax obligations. Understanding the type of beneficiary is key to knowing what happens to your 401(k) money when you die.

If a surviving spouse inherits your 401(k), they generally have more flexibility than a non-spousal beneficiary. These added options allow for more control over how the 401(k) funds are used and how income taxes are handled. Common choices include:

• Disclaiming the account and allowing it to pass to another designated beneficiary, such as a child

• Keeping the 401(k) and withdrawing the funds within 10 years, in line with the 10-year rule

• Merging the inherited 401(k) into their own retirement plan

• Rolling the funds into an IRA, either traditional or Roth, depending on eligibility

• Taking a lump-sum distribution, which may be subject to income tax

When a non-spousal beneficiary inherits a 401(k), such as a child, sibling, or friend, they have fewer options than a spousal beneficiary and must follow specific distribution rules.

Unlike a spouse, a non-spousal beneficiary cannot roll the inherited 401(k) into their own retirement account or treat it as if it were theirs.

There are usually four main options for non-spousal beneficiaries:

• Withdraw the full balance within 10 years, in line with the 10-year rule

• Open an inherited IRA and take distributions flexibly within that 10-year window

• Take a lump-sum distribution, with the full amount taxed as ordinary income in the year received

• Disclaim the inheritance, allowing it to pass to a contingent beneficiary, such as another family member or a trust

An exception may apply if the beneficiary is disabled or chronically ill, allowing for a longer withdrawal period. Understanding what happens to your 401(k) after death helps non-spousal beneficiaries navigate their choices and make informed decisions about the inherited funds and potential tax implications.

When a 401(k) account holder dies, the plan provider is notified, usually by the beneficiary, employer, or public records. The account is then frozen, and the designated beneficiary must provide documents like a death certificate and proof of identity to start the 401(k) transfer process.

After the transfer is initiated, the beneficiary can choose from available distribution options, which depend on their relationship to the deceased and whether the account is a traditional or Roth 401(k). These rules determine how a 401(k) is paid out after death, and the process can take several weeks, depending on how quickly the paperwork is completed.

To help ensure a smoother transfer, 401(k) account holders should consider the following before their death: 

• Choose your beneficiaries wisely: Name both a primary and contingent beneficiary to avoid delays or probate.

• Keep beneficiary info up to date: Review your choices regularly, especially after life changes such as marriage, divorce, or the birth of a child.

• Know your plan’s rules: Understand how your specific 401(k) plan handles accounts after death, including any default processes.

• Understand the tax impact: Different rules apply for Roth and traditional 401(k) funds. Both can have tax consequences for beneficiaries.

• Share account details: Let your beneficiaries know the account exists and where to find important documents when needed.

• Get estate planning advice: Consider working with a financial advisor to align your 401(k) with your broader retirement and estate planning strategy.

• Avoid naming your estate: Listing your estate as beneficiary usually triggers probate and limits distribution options.

While a 401(k) is a core part of retirement planning, it’s not the only way to grow and protect your wealth for the next generation. With Raisin, you can build additional savings through high-yield savings products, all managed through one platform. These tools not only help you earn more, but also keep your finances organized and accessible for your loved ones, giving you peace of mind.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.