Many people use 401(k) retirement plans to invest for their retirement. Because employee contributions are made to the retirement account before taxes, the employee benefits by lowering his taxes now, knowing that he'll be taxed on withdrawals at retirement. The employee names beneficiaries who will receive the funds upon his death, such as a surviving spouse or children.
Spouse as Beneficiary
If no specific beneficiary is listed to receive the funds upon the passing of the account holder, his spouse automatically becomes the primary beneficiary. However, most plans require the spouse or another person to be named on the account so that the account will not be subject to probate. If the account holder rolls the 401(k) over into an Individual Retirement Account before he dies, the spouse is not automatically the primary beneficiary of the IRA as she is with a 401(k).
Naming Others as Beneficiary
If the 401(k) account holder wants to name someone other than his spouse as his primary beneficiary, plan administrators require the spouse to agree to this in writing. This holds true even if the couple signed a prenuptial agreement that specifically stated that the spouse was not entitled to the account upon the account holder's death. The account holder's will or a trust does not supersede the primary beneficiary listed on the 401(k) plan's beneficiary designation form.
Multiple Primary Beneficiaries
While a spouse typically must be listed as a primary beneficiary on an account holder's 401(k), in most cases the account holder also can list other primary beneficiaries as well. In this manner, an account holder can designate how much of his retirement plan would go to each individual primary beneficiary. If all of the primary beneficiaries on the account die first, any secondary beneficiaries he listed on the account would receive the proceeds upon his death.
Rolling Over the Proceeds
If the surviving spouse is the sole primary beneficiary and receives the proceeds of the deceased partner's 401(k) account, she may not be able to roll over the funds into her own IRA without having to pay income tax on the distribution. If the account holder moves the 401(k) account into a Roth IRA or Roth 401(k) before his passing, the surviving spouse would be able to receive the funds without having to pay income tax on the proceeds, providing all other IRS requirements were sufficiently met.
Keeping the Account Open
Depending on the rules under the specific 401(k) plan, the surviving spouse may have the ability to keep the account in place and allow it to continue to grow without the immediate tax burden, typically until the year that her spouse would've reached 70 1/2 years old. The surviving spouse also may be able to take small distributions over a series of years from the account to spread out the taxes instead of taking the distribution as a lump sum.
- The Heritage Law Center: Can Surviving Spouses be IRA or 401(k) Beneficiaries?
- Elder Law Answers: Do Surviving Spouses Have a Right to a 401(k) or an IRA?
- Practical Money Skills: What is a 401(k) Plan?
- 401k Help Center: Seven Common Errors 401k Beneficiaries Make
- 360 Degrees of Financial Literacy: Choosing a Beneficiary for Your IRA or 401(k)
- IRS.gov: 401(k) Resource Guide - Plan Sponsors - General Distribution Rules
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