Your 401(k) does not automatically go to your spouse - you must explicitly name them as the primary beneficiary.
If you don't name a beneficiary, your 401(k) will go through probate and be distributed according to your state's intestacy laws, which may not align with your wishes.
You can name multiple beneficiaries, allocating percentages of your 401(k) to each one.
Beneficiaries can choose to take a lump-sum distribution or roll the 401(k) into an inherited IRA, which allows for required minimum distributions over their lifetime.
If your spouse inherits your 401(k), they have the option to treat it as their own 401(k) or roll it into their own IRA.
Non-spouse beneficiaries used to be able to stretch distributions over their lifetime, but a 2019 law now requires most to deplete the account within 10 years.
If your 401(k) is community property in a divorce, your ex-spouse may be entitled to a portion of the account.
Naming a trust as the 401(k) beneficiary can provide more control over how the assets are distributed, but comes with added complexity.
Life insurance payouts can be used to cover any taxes owed on 401(k) distributions by your beneficiaries.
Roth 401(k) accounts pass to beneficiaries tax-free, whereas traditional 401(k) distributions are taxable income.
Beneficiaries may be able to delay taking distributions if the 401(k) owner died before reaching age 72.
If your 401(k) balance is small enough, your beneficiary may be able to take a lump-sum distribution without facing the 10% early withdrawal penalty.
Updating your 401(k) beneficiary designations is crucial after major life events like marriage, divorce, or the birth of children.
Beneficiary designations supersede instructions in your will, so be sure to keep them current.
Proper 401(k) beneficiary planning can help your heirs avoid probate and minimize their tax burden.
If you have multiple 401(k) accounts, be sure to name beneficiaries for each one separately.
Your 401(k) balance is generally protected from creditors, even after your death, depending on your state's laws.
Inherited 401(k) assets are not subject to the 10% early withdrawal penalty for beneficiaries under age 59 1/2.
Spouses who inherit a 401(k) can postpone required minimum distributions until the deceased spouse would have turned 72.
In some cases, your 401(k) beneficiaries may be able to stretch distributions over their own life expectancy, rather than the 10-year rule.