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Who can inherit a 401(k): can all the money be taken out of the pension plan?

401(k) plans are retirement savings accounts for individuals but they can also be passed on in death, in most cases.

As the Baby Boomer generation begins to retire many concerns over the solvency of Social Security is driving interest in 401(s). How much should one save?
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The rules regarding who can inherit a 401(k) and how the funds can be withdrawn depend on a few different factors, such as the account owner’s age, the beneficiary designation on the account, and the specific provisions of the 401(k) plan.

It’s important to note that there are generally tax implications associated with withdrawing funds from a 401(k) plan, regardless of who inherits the account. Additionally, some 401(k) plans may have specific rules and restrictions around withdrawals and beneficiary designations, so it’s always a good idea to consult with a financial advisor or the plan administrator for more information.

Here are some general guidelines:

Can a spouse inherit a 401(k) plan?

If the account owner is married and the spouse is named as the primary beneficiary of the 401(k) then the spouse has several options for withdrawing the funds:

  • Roll over the funds into their own 401(k) plan.
  • Leave the funds in the 401(k) plan and take distributions over time with annual required distributions, though this is limited if the account owner died in 2020 or later.
  • Withdraw all funds within 5 years after the owners death, if they died before 2020.
  • Withdraw all funds within 10 years after the owners death if the owner died in 2020 or later.
  • or take a lump sum distribution.

What about a non-spouse?

If the account owner names someone other than their spouse as the primary beneficiary of the 401(k), the beneficiary generally has the option of taking a lump sum distribution, rolling over the funds into an inherited IRA, or taking distributions over time.

There is a 10 year limit for non-spouses to take the payouts though this period only begins once the person becomes of age.

The plan can be distributed to an estate

If the account owner did not name a beneficiary or if the primary beneficiary predeceases them and no contingent beneficiary is named, the 401(k) funds will typically be paid out to the account owner’s estate. In this case, the funds will be distributed according to the account owner’s will or, if they did not have a will, according to the laws of the state in which they lived.