What Happens to a 401(k) When Someone Dies?

The Short Answer

A 401(k) is a non-probate asset. It passes by the beneficiary designation on file with the plan, which controls no matter what the will says. What the heir can do with it depends on who they are: a spouse has the most flexibility, while most other heirs are now on a 10-year clock to empty the account. The rules mirror those for an inherited IRA, with one wrinkle: a workplace 401(k) is also governed by the employer’s plan document, which can be more restrictive.

Who Inherits a 401(k)

The beneficiary form the account owner filed with the plan decides who inherits, and it overrides the will. Federal law adds a protection unique to workplace plans: under ERISA, the surviving spouse is automatically the beneficiary of a 401(k) unless the spouse signed a written waiver giving that up. So an old form naming a parent or a former partner may not control if the owner later married.

This is why keeping a beneficiary form current matters more than almost any clause in a will. When the form is clear and current, the plan pays the named person quickly and the account never enters probate.

If a Spouse Inherits

A surviving spouse has choices no one else does:

• Roll it into their own IRA or 401(k). The spouse treats the money as their own and does not have to start withdrawals until their own required-distribution age. This is the most common choice.
• Keep it as an inherited account. A spouse who is under 59 and a half and needs the money can leave it as an inherited 401(k) and withdraw without the 10% early-withdrawal penalty.

Each path has different timing and tax effects, so a spouse usually reviews the choice with a financial or tax advisor before moving the money.

If Someone Else Inherits

For deaths in 2020 and later, the SECURE Act replaced the old lifetime “stretch” for most non-spouse heirs with a 10-year rule: the beneficiary must withdraw the entire balance by the end of the tenth year after the owner’s death. There is no annual minimum in most cases, but the account has to be empty by year ten.

A narrower group, called eligible designated beneficiaries, can still spread withdrawals over their own life expectancy: a minor child of the owner (until they reach the age of majority, then the 10-year clock starts), a beneficiary who is disabled or chronically ill, and a beneficiary who is not more than 10 years younger than the owner. Everyone else is on the 10-year clock.

If No Beneficiary Is Named

When the form is blank, names someone who died first, or names “my estate,” the plan document takes over. Many plans default to the surviving spouse and then to the estate. Once a 401(k) is payable to the estate, it does pass through probate, and the heirs lose the flexible payout options, often having to empty the account faster (within five years for many plans). That is the costly outcome an up-to-date beneficiary form avoids.

Taxes on an Inherited 401(k)

A traditional 401(k) was funded with untaxed dollars, so every dollar an heir withdraws is taxed as ordinary income to them. A Roth 401(k) generally comes out tax-free. A 401(k) does not receive the step-up in basis that a house or a brokerage account gets, because it is income in respect of a decedent. A large inherited balance withdrawn in one year can push an heir into a higher tax bracket, which is why spreading withdrawals across the 10 years is often the smarter move.