Who inherits a 401(k) when the owner dies?

A 401(k) passes to the named beneficiary on the account — not through the will, and not through probate. The beneficiary designation controls. If the account owner is married, federal law (ERISA) generally requires the spouse to be the primary beneficiary unless the spouse has signed a written waiver. If there is no named beneficiary (or if beneficiaries have predeceased the account owner), the account typically passes to the estate and goes through probate, which triggers accelerated tax obligations. This is why keeping beneficiary designations current is critically important.

Does a surviving spouse have special options for inheriting a 401(k)?

Yes — spouses have more flexibility than any other beneficiary. A surviving spouse can: roll the 401(k) into their own IRA (the most common and often most tax-advantageous option — they treat it as their own and can delay required minimum distributions until they turn 73); roll it into an inherited IRA (which may allow more time before distributions); or take a lump-sum distribution (immediately taxable as ordinary income). Spouses are the only beneficiaries who can roll an inherited 401(k) into their own IRA. Non-spouse beneficiaries have different, more restricted options under the SECURE Act.

How are 401(k) withdrawals taxed after the owner dies?

Distributions from an inherited 401(k) or inherited IRA are taxed as ordinary income in the year they are taken — whether by a spouse, a child, or any other beneficiary. There is no stepped-up basis for retirement accounts (unlike for inherited stocks or real estate). The account's pre-tax contributions and growth become fully taxable when withdrawn. This is why planning the timing of distributions matters: spreading withdrawals over the maximum allowed period rather than taking a lump sum can significantly reduce the tax impact.

What is the 10-year rule for inherited 401(k)s?

The SECURE Act (2019) significantly changed the rules for most non-spouse beneficiaries. Under the 10-year rule, most non-spouse beneficiaries must withdraw the entire balance of an inherited 401(k) or IRA within 10 years of the original owner's death. There are no required annual distributions — you can take as much or as little as you want each year, as long as the entire balance is distributed by the end of year 10. Exception: "eligible designated beneficiaries" — a surviving spouse, minor child of the deceased, a beneficiary not more than 10 years younger than the deceased, or a beneficiary who is disabled — have different rules.

What Happens to a 401(k) When You Die? A Guide for Beneficiaries

A 401(k) is often one of the largest assets a person leaves behind — and it's one of the most misunderstood in terms of how it passes after death. Unlike most assets, a 401(k) doesn't go through your will or probate. It goes directly to whoever you named as beneficiary. Here's how it all works.

How a 401(k) Passes After Death

A 401(k) account has a beneficiary designation — a form you fill out with your employer or plan administrator naming who should receive the account when you die. At your death, the account passes directly to the named beneficiary, regardless of what your will says.

This is critical: your will cannot override a beneficiary designation on a 401(k). If your will says "everything to my daughter" but your 401(k) names your ex-spouse as beneficiary, the ex-spouse gets the 401(k). Period. Keeping beneficiary designations current is one of the most important estate planning tasks, and one of the most commonly neglected.

If there is no beneficiary

If no beneficiary is named, or all named beneficiaries have predeceased the account owner, the account typically passes to the estate — meaning it goes through probate and is distributed according to the will (or state intestacy law if there's no will). This creates a significant tax problem: estate beneficiaries generally cannot use the extended distribution periods available to individual beneficiaries. The entire account may need to be distributed within five years, triggering a large taxable income in a short period.

Spousal Inheritance: The Most Flexible Option

A surviving spouse has more options than any other beneficiary for inheriting a 401(k). Options include:

Roll over to their own IRA

The most common and often most tax-advantageous option. The surviving spouse rolls the inherited 401(k) into their own IRA (or their own Roth IRA if it was a Roth 401k). The account is then treated as their own — they can continue contributing (if under 73 and still working), delay required minimum distributions (RMDs) until they turn 73, and name their own beneficiaries.

Roll over to an inherited IRA

The spouse can also roll the account into an inherited (or "beneficiary") IRA under their spouse's name. This is sometimes done when the spouse is under 59½ and needs to take distributions before retirement age without the 10% early withdrawal penalty (inherited IRA distributions are not subject to the early withdrawal penalty).

Leave funds in the plan

In some cases, the surviving spouse can leave funds in the deceased spouse's 401(k) plan — useful if the plan has particularly good investment options. Check with the plan administrator about rules and timeline.

Take a lump-sum distribution

The surviving spouse can take the entire balance as a lump sum. This is immediately taxable as ordinary income — often creating a significant tax bill in a single year — and is generally not advisable unless funds are urgently needed.

Non-Spouse Beneficiary Options Under the SECURE Act

The SECURE Act (2019) and SECURE 2.0 (2022) significantly changed the rules for most non-spouse beneficiaries. The most important change: the 10-year rule.

The 10-year rule (most beneficiaries)

Most non-spouse beneficiaries must withdraw the entire balance within 10 years of the original owner's death. There is no required annual distribution — you can take as much or as little as you want in any year during the 10-year window, as long as the account is fully distributed by the end of year 10. The flexibility is real, but the 10-year limit is firm.

Eligible designated beneficiaries (different rules)

Certain beneficiaries qualify for longer distribution periods:

Surviving spouse — can treat as their own account (as above)
Minor child of the deceased — can use a life expectancy payout until reaching the age of majority (18 or 21 depending on state), then the 10-year rule kicks in
Chronically ill or disabled beneficiary — can use life expectancy distributions
Beneficiary not more than 10 years younger than the deceased — can use life expectancy distributions

Tax Considerations for Beneficiaries

Every dollar withdrawn from a traditional 401(k) by a beneficiary is taxed as ordinary income in the year it's taken. There is no stepped-up basis (unlike inherited stocks or real estate). Planning the timing of distributions matters significantly:

Taking the entire balance in one year could push you into a much higher tax bracket
Spreading distributions over the 10-year window (for those subject to the 10-year rule) can smooth the tax impact
In low-income years, taking larger distributions can be more tax-efficient
Roth 401(k) accounts pass income-tax-free to beneficiaries (as with Roth IRAs), though the 10-year distribution rule still applies

The tax implications of inheriting a 401(k) are significant enough to warrant a conversation with a CPA or financial advisor before making distribution decisions.

What Beneficiaries Need to Do

Notify the plan administrator. Contact the company that holds the 401(k) — typically the plan administrator or the financial institution — and notify them of the death. You'll need a certified death certificate.
Provide required documentation. Typically includes: certified death certificate, your ID, and the beneficiary designation form if the plan administrator doesn't have it on file.
Choose your distribution option. Understand the options available to you as a spouse, non-spouse, or eligible designated beneficiary before making a decision. Mistakes here can be costly and often irreversible.
Consult a tax advisor. Especially for large accounts, the tax planning around distributions can be worth significant amounts.

For Account Owners: What to Do Now

Review your 401(k) beneficiary designation today. Is it current? Does it reflect your actual wishes?
Name primary and contingent beneficiaries. If the primary beneficiary predeceases you, the contingent beneficiary receives the account — without one, it may default to the estate.
Update after major life events: marriage, divorce, birth of a child, death of a named beneficiary.
Consider naming a trust as beneficiary if you have complex family circumstances (minor children, a beneficiary with special needs, a blended family). This requires specific trust language; consult an estate attorney.
Store your beneficiary designation information somewhere your family can find it. FinalKeepSake is designed for exactly this.