When your spouse dies, almost nothing can get between you and his 401(k). Federal law makes you the automatic beneficiary: Unless you signed a waiver letting him name someone else, the money is yours. As the deceased's spouse, you have more options for managing the account assets than other beneficiaries, such as his children or siblings.
If the plan allows it, you can simply turn the account into a beneficiary 401(k) and keep it open. You'll have to withdraw the cash eventually, but not until the year your spouse would have turned 70 1/2, the age when mandatory minimum withdrawals begin. Between now and then, you can simply let the money sit in the account earning interest tax-free. That gives you a larger retirement fund when your own retirement rolls around.
Roll It Over
As a spouse, you get an option most heirs don't -- rolling over the 401(k) funds into your own IRA. If you're a sharp investor and you want more options than the 401(k) plan offers, this can be a good deal: With an IRA you can invest in almost anything. If actively managing your portfolio isn't your cup of tea, letting the money stay put might be the better option. Fees on IRA accounts are often higher, and they can sap some of your savings.
Take It Out
If you need the money in your spouse's account, there's no law that says you can't withdraw it immediately. Normally, the IRS applies a tax penalty to withdrawals from retirement accounts before you turn 59 1/2, but a dead spouse's account is an exception. You still pay regular income tax on the money, however. If you convert the 401(k) to a beneficiary account, you can make small withdrawals whenever you choose.
Even if you're the named beneficiary, you don't have to take the money. Federal law gives you nine months after your husband's death to disclaim the account, which lets it pass to the backup beneficiary. You can only do this if you don't touch any of the money in the account and if there's an alternative beneficiary to inherit it. This may be a worthwhile option if the backup beneficiary is someone you care about and who needs the money more than you do.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.