Key takeaways

• A surviving spouse usually inherits 401(k)s automatically, but IRA rules vary by state.
• Most non-spouse heirs must withdraw inherited retirement funds within 10 years.
• It's a good idea to review your beneficiary designations at least yearly and make any needed changes to reflect your wishes..

Beneficiary choices shape your financial legacy. Review them often and understand how 401(k) and IRA inheritance rules affect heirs.

What is a beneficiary?

A beneficiary is any person or organization designated to inherit assets when someone dies. Trusts, estates, wills, and life insurance policies all have beneficiaries — as do many annuities and pensions. But you're most likely to encounter beneficiary designations when opening a tax-advantaged retirement account like an IRA.

Understanding what happens when inheriting retirement accounts

It’s important to name beneficiaries. Should you die without naming beneficiaries, your account could pass into probate — a lengthy legal process that will slow or even prevent distribution of your savings to your heirs, with possible tax consequences. In most employer-sponsored retirement plans under federal law, a surviving spouse will inherit if no beneficiary is validly designated. The rules for IRAs vary according to state laws and the plan/documents.

Read more: Taxes on inheritance and how to avoid them

What is a contingent beneficiary?

Retirement account administrators usually ask you to name primary and contingency beneficiaries. A contingent beneficiary receives the benefits of an account if the primary beneficiary dies, cannot be reached, or disclaims (refuses) the inheritance.

Typically, your spouse would be your primary beneficiary, and your children would be your contingent beneficiaries. That means if you and your spouse die at the same time, your children would inherit your account, which would be divided according to the percentages you have assigned. Accounts inherited by minors are typically managed by court-appointed custodians until the children reach adulthood.

Keep in mind that you can have more than one primary beneficiary (called co-beneficiaries). These co-beneficiaries would share the inheritance based on the percentages you have set.

Does my spouse have to be my primary 401(k) beneficiary?

While you are free to choose a primary beneficiary other than your spouse, most company-sponsored 401(k) plans require that your spouse sign a consent form if they are not listed as the primary beneficiary, and some states require the same with IRAs.

If you’re single and without children, beneficiaries could include friends, relatives or charitable organizations — it’s up to you.

Inheriting a 401(k) or other retirement account

Although spouses can generally transfer inherited accounts into their own names, children and other beneficiaries must follow different rules. These rules differ depending on the kind of retirement account inherited.

Inheriting a 401(k) account

Any beneficiary can close an inherited 401(k) and take a lump-sum distribution, without penalty, at any age. However, they will pay income tax on the withdrawal, which could put them in a higher tax bracket.

Spouses and minor or disabled children who inherit 401(k) accounts can take annual distributions over the course of their lives. The set amount of these distributions is determined using IRS life expectancy tables. Under the SECURE 2.0 Act, most non-spouse beneficiaries must withdraw the entire balance of an inherited 401(k) or IRA within 10 years, though annual withdrawals may not be required as long as the account is emptied by the end of year ten.

Inheriting a traditional IRA

Anyone who inherits a traditional IRA can take a lump-sum, taxable distribution. Spouses can roll an inherited IRA into their own IRA and wait until they turn age 72 before taking required minimum distributions (RMDs). Or they can remain the beneficiary of the inherited IRA, which could mean taking RMDs right away if their spouse died at age 72 or older. The best choice depends on the age of both spouses at the time of the account holder’s death.

The rules for non-spouses to inherit a traditional IRA are very similar to the applicable 401(k) account rules noted above.

Inheriting a Roth IRA

Distributions from an inherited Roth IRA are tax-free only if the account has been open at least five years; otherwise, earnings may be taxable even though contributions remain tax-free.¹ Spouses who are sole beneficiaries, and some heirs like minor or disabled children, can take RMDs over their lifetimes. Most non-spouses, however, must empty an inherited Roth IRA within 10 years.

Read more: Inherited IRA beneficiary options & withdrawal rules

A final word on beneficiaries

Consider reviewing your beneficiary designations regularly — especially after major life events — and consult your plan administrator or a financial professional to ensure your choices remain valid and tax-efficient.Also make sure your heirs know about your retirement account(s) so they can contact the appropriate financial institution(s) when you die. And if you have inherited a 401(k) account or an IRA, consider consulting with a financial professional to make sure you manage those assets in a way that’s best for your unique situation.