What are 401k beneficiary rules for the surviving spouse?
If your spouse designated you as a beneficiary of their 401(k), you have various options with the inherited 401(k). Here are the options you have.
Inheriting a 401(k) after the death of your spouse is different from inheriting other types of assets. The IRS provides rules that a named beneficiary such as a spouse should follow to determine what to do with the inherited 401(k), and how much tax to pay when they inherit the spouse's retirement assets. If you are in the process of inheriting a 401(k), you should ensure you follow all the IRS rules for taking ownership of an inherited 401(k).
When a spouse inherits the 401(k) funds of their deceased spouse, they get more options with the money than other named beneficiaries. If you are the beneficiary of a deceased spouse’s 401(k), you can decide to leave the money in the spouse’s retirement account, rollover the money into an IRA, rollover the money into an inherited IRA, or even withdraw all the inherited 401(k) money.
401(k) Options for a Surviving Spouse
If you inherited a 401(k) plan, your decision of when and how to take the money out of the retirement plan will largely depend on your age at the time of your spouse’s death.
Here are the different rules that apply to an inherited 401(k):
If you are below 59 ½
If you inherit a 401(k) but you are not yet 59 ½, here are the options you have with the 401(k) money:
Leave the Money in the Plan
You can leave the inherited funds in the spouse’s retirement plan. You can withdraw funds from the inherited 401(k) without paying the 10% penalty tax that is charged for early withdrawals. However, you will owe taxes on the withdrawal. If your spouse was already taking the required minimum distributions (RMDs), you will be required to continue the distributions.
Rollover to an Inherited IRA
An inherited IRA is designed to hold rolled over funds from an inherited 401(k). You can transfer the inherited 401(k) funds to an inherited IRA, and start taking distributions without paying an early withdrawal penalty. You can start taking RMDs from the inherited IRA based on the single life expectancy table. You will also be required to name beneficiaries for this account.
Rollover to Your IRA Account
If you have an IRA, you could rollover the 401(k) into the IRA with no tax implications. However, once you rollover the funds and decide to make a withdrawal, the transaction will be considered a regular distribution and you will owe taxes, in addition to a 10% early withdrawal penalty.
If You Are Over 59 ½ (But Below 72)
If you are 59 ½ or older when you inherit your spouse’s 401(k) plan, here are some of the options you have:
Leave the funds in the plan
You can leave the inherited funds in your spouse’s plan, and continue taking required minimum distributions if the spouse had started distributions. You can also wait until when your spouse would have attained age 72 to start taking distributions from the account.
Rollover to an IRA
You can transfer the inherited 401(k) to your IRA. In this case, you will not be required to start taking distributions until you reach 72, regardless of whether your spouse was already taking distributions. This option also allows you to withdraw money from the IRA penalty-free before you reach the RMD age. However, you will owe taxes on the distribution.
Rollover to an inherited IRA
You can move the spouse’s 401(k) to an inherited IRA. This option allows you to start taking distributions from the account, based on the life expectancy table. Depending on the distributions you qualify to take, you can decide to take more than the required amounts, but not less.
If you are over 72
If you have reached the mandatory distributions' age, you will be required to take minimum distributions, regardless of whether you rollover the inherited 401(k) or leave it in the retirement plan. Here are some of the choices you have:
Leave the money in the plan
If you decide to leave the money in the retirement plan, you must start taking RMDs based on the distribution schedule that applied to your spouse. The beneficiary designations provided by your spouse will still apply in this case.
Rollover to your IRA
You can rollover the inherited money to your IRA, or even to a spousal IRA. In this case, you will be required to take the required distributions based on the Uniform Lifetime Table (PDF) and your age. Since you own the IRA, you can name your beneficiaries.
Rollover to inherited IRA
You can move your funds to an inherited IRA, and start taking distributions from the account. You can decide to take more than the required amount, but you cannot take less. You may also name your own beneficiaries in the inherited IRA.
What to Do If You Inherit a 401(k)
Any time death occurs, the IRS will require the beneficiaries to pay estate tax on the assets of the deceased. Depending on the value of assets left behind by your spouse, you might be required to pay federal and state taxes. If you are concerned with minimizing the tax liability, you should seek the help of an estate planning specialist to help you manage the various taxes. The tax specialist will also help you plan how to manage the retirement assets.