401k Withdrawal Rules for Heirs
- If your 401k is paid to your spouse, she can roll the funds into her own IRA and delay taking distributions from the account until she reaches age 70 1/2. Since the IRS does not tax retirement funds until money is withdrawn from the account, a rollover can result in significant tax savings for your spouse in addition to extra growth for her inheritance.
- If you are unmarried or if your spouse signs a written waiver of her right to inherit your 401k, you may name your child, a friend, or another person as beneficiary. A non-spouse beneficiary can roll an inherited 401k into a specially established inherited IRA, but she cannot delay taking withdrawals from the account. Instead, your beneficiary must take annual distributions based on her life expectancy. If a beneficiary fails to withdraw the required minimum in any given year, she will be subject to penalties as well as taxes.
- If you do not leave behind a spouse and there is no named beneficiary of your account when you pass away, your 401k becomes part of your probate estate. The IRS requires that a 401k paid to a decedent’s estate be distributed over a period of five years.
- If your beneficiary chooses to roll over your 401k into an IRA, the deadline for the transaction is December 31 of the year following your death.
If your beneficiary misses the deadline or chooses not to complete a rollover, she generally will be required to withdraw the funds remaining in the original 401k over a period of five years. This not only increases the taxes she’ll pay, but it also limits the total value of her inheritance since the account is paid to her rather than given time to keep growing. - When completing a rollover, your beneficiary should arrange for your 401k administrator to transfer funds directly to her inherited IRA. If a check is sent to the beneficiary, the administrator will withhold 20 percent of the plan balance, even if your beneficiary immediately deposits your 401k funds into her new account.