Choosing a Beneficiary for Your 401(k)

Sep 21, 2021 3 min read

When you have a 401(k) plan, you’re one step closer to building a nest egg for your future. Now comes the tricky part: choosing a beneficiary. In order to make a smart decision, there are several factors to consider, such as marriage status and the impacts of income tax. Here, we guide you through the process of selecting the 401(k) beneficiary that’s right for you.   

What Is a 401(k) Beneficiary?

A 401(k) beneficiary is the person who will receive the funds in your retirement account upon your death. When you begin participating in a 401(k), you’ll be given a form to name your beneficiaries.

What Is the Importance of Beneficiaries?

Choosing a 401(k) beneficiary now means you have a say in what happens to your retirement money later.

If you don’t name a beneficiary, there’s a good chance your 401(k) account can end up in probate after your death. Why is this bad? For starters, probate is expensive. Court fees, appraisals and attorney fees can add up to nearly 5% of the value of your assets. Second, state law can decide who inherits your money. And finally, probate is slow, sometimes taking years to distribute assets.

Naming a 401(k) beneficiary is key to eliminating the costly expense of probate and ensuring that your assets are distributed to whom you choose and when. 

How Do You Choose a Beneficiary?

When choosing a 401(k) beneficiary, you’ll be required to name at least two people:

  • Primary beneficiary: This person is your first choice as the recipient of your retirement assets upon your death.
  • Contingent beneficiary: This person will receive your retirement assets if your primary beneficiary isn’t alive when you die or declines to accept the benefits.

The 401(k) beneficiary designation rules allow you to name more than one person as primary or contingent beneficiaries. If you decide to do this, make sure you specify the percentage that each person receives. The shares don’t have to be equal, they just have to total 100%.

When examining your 401(k) beneficiary options, keep these questions in mind:

  • Are you married? If you’re married, 401(k) beneficiary rules automatically say your spouse is the primary beneficiary. To name someone other than your spouse, your spouse will need to sign a notarized waiver to agree to the change.
  • Are you single? If you’re single, 401(k) beneficiary rules say you can choose anyone as your beneficiary — parents, children, siblings, friends, even a charity — without additional documentation.
  • Do you have children who are minors? Most 401(k) plans don’t transfer assets to a surviving child who is underage. Depending on your state’s laws, you can name a minor as a beneficiary as long as you also choose a guardian to manage the assets. Or you can create a trust, also naming a guardian or trustee.

How Can You Change Your Beneficiary?

Changes to your 401(k) beneficiaries take just a few minutes and are done the same way as when you first named your beneficiary — simply complete a new beneficiary designation form.

Try to review your beneficiary designation form at least every two to three years. And be sure to update your beneficiaries to reflect major changes in your financial or life circumstances, such as:

  • Marriage
  • Divorce
  • Separation
  • Death in the family
  • Birth of a child
  • Adoption of a child

Are There Taxes on an Inherited 401(k)?

Most inherited assets, such as bank accounts, stocks and real estate, pass to your beneficiaries without income tax being owed. However, that’s not usually the case with 401(k) plans. Because you funded the account with pre-tax income, the earnings haven’t been taxed either. Thus, when your beneficiary takes withdrawals from the account, those distributions are considered taxable income. Your 401(k) beneficiary may have to take required minimum distributions, or RMDs, which are also considered taxable income.

Recent legislation adjusted the 401(k) beneficiary rules so now beneficiaries must withdraw assets from an inherited 401(k) within 10 years after your death. Exceptions to the 10-year rule include:

  • A surviving spouse can roll inherited funds into an IRA without paying taxes.
  • A surviving minor child must withdraw funds from the inherited 401(k) within 10 years of reaching age 18.
  • Beneficiaries who are less than 10 years younger than you (for instance, a sibling) are allowed to stretch distributions over their lifetime.
  • Beneficiaries with disabilities or who are chronically ill can take distributions over their lifetime.

Planning for the Future

We know that taking care of your loved ones is a top priority for you. That’s why we’re here to help. Call a Farm Bureau financial advisor today to discuss how you can plan for tomorrow.


Neither the Company nor its agents or advisors give tax, accounting or legal advice. Consult your professional advisor in these areas.


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