How To Inherit The Proceeds of a 401K Upon a Loved One’s Death

Inheritance rights of a 401k retirement plan are determined by the terms of the agreement made with the employee and their employer. If the decedent failed to designate beneficiaries for the 401k benefits, then any funds passing under the plan will be part of the deceased’s estate that will have to be probated. Depending on the size of the decedent’s estate, a formal or an informal probate proceeding will be necessary to collect the 401K and distribute it among the heirs of the decedent. However, if you are named as the beneficiary in the 401k, then any proceeds under the plan pass outside of probate. What this means is that you would simply have to send in a certified copy of the holder’s death certificate and fill out any mandatory paperwork required by the 401k custodian. Check with the decedent’s employer that set up the 401k to see what they require.

Even if you are named a beneficiary in the 401k plan, it is imperative that you consult with a Certified Public Accountant or lawyer to assist you with any potential tax implications. You may face penalties for late withdrawals, depending upon the 401k plan. Typically, a beneficiary has two options: you can withdraw the 401(k) funds over five years or take the money immediately. An estate lawyer or CPA can advise you of the consequences of withdrawing the funds from the plan immediately. Withdrawing the funds in one lump-sum maximizes the taxes a beneficiary will have to pay, so, generally, this is not the best choice.