How to designate a beneficiary for your 401(k) account

Like many Americans, you’re probably contributing to a 401(k) plan as a way to help you save for retirement. Ideally, you will be the person who someday uses the funds in your 401(k) after you retire. But if you were to pass away before then, your 401(k) assets would pass on to someone else: your beneficiary.

What is a beneficiary?

For 401(k)s, your beneficiary is the person or organization you choose to receive the earnings in your 401(k) account if you were to pass away.

There are two types of beneficiaries you can name:

• Your primary beneficiary is the first beneficiary you want to receive your 401(k) assets at your death.
• Your contingent beneficiary, or secondary beneficiary, will receive the assets if your primary beneficiary can’t or won’t.

A 401(k) is a non-probate asset. This means your beneficiary can inherit the account directly, instead of waiting for it to go through probate. Probate is a court-supervised process that distributes your property to the people you choose to receive it after you pass away. Probate can be long and expensive, which is why it’s helpful that your 401(k) account can bypass it.

Since your 401(k) is a non-probate asset, you shouldn’t include it in your last will and testament. Even if you did, whoever you name in your beneficiary designation form will override it. That’s why it’s important to review your beneficiary designation every three to five years, or whenever you have a big life event, to make sure it’s up to date.

Beginning January 1, 2020, as outlined in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, most beneficiaries need to withdraw all assets from an inherited 401(k) account within ten years of the original account holder’s death. There are some beneficiaries who are excluded from this rule, including:

• Surviving spouses
• Minor children
• Disabled or chronically ill beneficiaries
• Beneficiaries who are less than 10 years younger than the original account holder

How to name a beneficiary on your 401(k) account

If you name a person as your beneficiary, you should provide their full legal name, mailing address, date of birth, and Social Security number. You may also be asked to explain their relationship to you. If you name an organization (like a charity) as your beneficiary, you should provide the organization’s name, mailing address, and their Employer Identification Number (EIN). This information makes it easier for your 401(k) provider to verify their identity.

Depending on your provider, there may be multiple ways to designate a beneficiary. Here are several potential options:

• Fill out the beneficiary designation form supplied by your 401(k) provider. Beneficiary designation forms are usually available on your provider’s website. You can print them, fill them out, and mail them back to your provider.
• Set your beneficiary designations directly through an online portal on your provider’s website.
• Call your provider and choose your beneficiaries over the phone.
• Use FreeWill’s beneficiary designation platform. We provide step-by-step instructions for how to reach out to your provider to name your beneficiaries, including specific phone numbers and help lines. You’ll receive all your beneficiary information on a printable page that you can store with your other estate planning documents.

After you make your beneficiary designation:

• Follow up with your provider to make sure they’ve received and recorded your designation.
• Keep the details of your 401(k) account with your other estate planning documents. This includes your account number, provider information, and a copy of the beneficiary designation form. That way, your loved ones can easily find your account details and notify your provider if you were to pass away.

Who can be a beneficiary on a 401(k) account?

You have many options (and some limitations) when it comes to choosing a beneficiary. Here are some to consider:

1. Designate a family member or friend.

This includes your spouse, domestic partner, child(ren), relatives, or friends. You don’t need to be related to someone to name them as a beneficiary.

However, if you’re married, your spouse is usually entitled to the assets in your 401(k). You can’t choose a different beneficiary unless your spouse waives their inheritance rights. To do that, they can fill out and notarize a spousal consent form from the institution where you have your 401(k). If you name a different beneficiary without getting your spouse’s consent, the court will likely give the asset to your spouse anyway.

2. Designate a trust in your will.

A trust is a legal agreement that lets you give a third party the ability to manage your assets on behalf of your beneficiaries. This third party is called a “trustee.”

As an example, let’s say you write in your will that, when you pass away, you want a trust established for your young child. This means your child will receive their inheritance in a trust, rather than outright. You have the option to name this trust as the beneficiary of your 401(k) account. When you pass away, your trustee will receive the assets and manage them according to your preferences. Then, your minor beneficiary will inherit the assets in the trust when they reach adulthood (usually at age 18) unless you specify otherwise.

If you want to name a trust in your will as the beneficiary of your 401(k), it’s a good idea to speak with an estate attorney.

3. Designate a charity or nonprofit organization.

You may not know it, but you can designate a charity as the beneficiary of your 401(k) account (and any other assets you own!). It’s a meaningful, effective way to create a lasting legacy, both for yourself and for causes that are closest to your heart.

Why should you assign a beneficiary to your 401(k)?

Like we mentioned earlier, your 401(k) account is a non-probate asset. This means it’s able to skip probate and go directly to your beneficiary — but only if you designate one. Why does that matter?

• It makes the process easier for your beneficiary. They’ll inherit your account much faster if it can skip probate. That can make a huge difference for a surviving family member who needs the money to continue paying a mortgage, bills, and more.
• You can name a beneficiary who wouldn’t otherwise inherit from you — like your favorite charity. According to law, a charity or non-relative would never be entitled to inherit anything from you unless you specify they should. Naming a beneficiary for your 401(k) account gives you control over who receives the funds.

What happens if you don’t choose a beneficiary for your 401(k)?

If you don’t name a beneficiary for your 401(k), your state’s laws will determine who receives it. Many financial institutions will name a default beneficiary, like your spouse, if you don’t choose one yourself. But if there’s no default, the asset will become part of the probate process. This will likely take extra time and money and delay how quickly your beneficiaries can access and use the funds in your 401(k).

The bottom line is that if you don’t choose a beneficiary for your 401(k), you won’t have any control over who inherits it. It may even have to go through probate, which can be expensive and time-consuming for everyone involved.

Do beneficiaries have to pay taxes when they inherit a 401(k) asset?

It depends. If someone inherits your 401(k) account, several kinds of taxes may come into play. We break them down below.

Estate and inheritance taxes

Your 401(k) is part of your taxable estate, meaning it may be subject to estate taxes before your beneficiary can receive it. In 2023, the federal estate tax exemption is $12.92 million. This means that, if the value of your taxable estate is below $12.92 million, your estate won’t have to pay federal estate tax. The exemption is scheduled to drop to around $6 million at the end of 2025.

In addition to federal tax, a handful of states also have a separate estate tax and/or inheritance tax. (Inheritance tax is a tax your beneficiary may have to pay when they inherit your assets, depending on their relationship to you.). Your state’s laws will determine if your 401(k) account is subject to these taxes.

Income taxes

Depending on which type of 401(k) account you have, your beneficiary may have to pay income taxes when they withdraw money.

There are two types of 401(k) accounts. If you have a Roth 401(k) account, your beneficiary can make withdrawals (called “distributions”) without having to pay tax on them. If you have a traditional account, your beneficiaries will likely have to pay income taxes — just like you would have had to, if you were the one receiving the funds. Here’s why:

Roth (after-tax) accounts

Contributions you make to a Roth account are taxed before they enter your 401(k) account. Since this money has already been taxed, your beneficiary can withdraw money at any time, tax free.

Traditional (pre-tax) accounts

Contributions you make to a traditional 401(k) account go directly from your paycheck into your account without being taxed. Any earnings you’ve made have also not been taxed.

Instead, traditional 401(k) plans are taxed when money is withdrawn. So, when your beneficiary inherits your account and withdraws money, they’ll have to pay income tax on that money.

There are some exceptions to this. For example, nonprofits don’t have to pay income tax on payouts from traditional 401(k) accounts. If you have questions, consider speaking with a financial advisor about your situation.

Choosing a 401(k) beneficiary creates peace of mind

Naming a beneficiary for your 401(k) takes minutes, but it can provide long-term peace of mind for you, and security for the people and causes that matter most to you. Not sure where to start? FreeWill’s beneficiary designation platform will walk you through the process in just a few minutes.