401k Distribution after Death

When funds are left in a 401k after death, those must be distributed to the benefactor chosen by the participant. The way they are distributed depends on the choices of the company administering the 401k along with personal choices of the benefactor.

Distribution Rules

There are two rules that apply to an after-death distribution. One of the two must be used in all cases. The first allows for payments to be made within 5 years of the death of the participant. The second option allows a benefactor to received payments through his or her lifetime on a regular basis. The company administering the 401k may limit the option it will provide. Or, the benefactor may choose the preferred option. In any case, the election must be made by December 31 in the year of the death of the participant.

Other Regulations

The funds do not go to the benefactor tax free. Instead, the benefactor must pay an estate tax on the money left in the 401k. Any funds that were not fully-vested in the 401k at the time of the participants death may be omitted from the payments to the benefactor. A company must deposit an employee's withholding before the 15th business day of the next month, but the company may wait to make its own contribution.


Can a 401k be used to pay off debt after someone dies?

A 401k will typically be used to pay off bills and debt after the death of the account holder. In fact, most situations will mandate the repayment of debt and bills before a beneficiary can collect any money from the account. This will be required by law if no beneficiary is named and the 401k becomes part of the deceased's estate during probate. If the account passes on to the deceased's heirs-at-law, it is not part of the probate process. However, the inheritors of the estate must find a way to pay off the deceased's debt, and using the 401k funds may be wise.

Does a death distribution reduce my retirement contribution credit?

A death distribution made to you does not reduce your retirement contribution credit in the event of a 401k account holder's death. The death distribution you receive as the beneficiary on a retirement account will be passed on to you in one of a few ways: if you are a spouse, you may add the sum to your account; if you are a non-spouse beneficiary, you must take distributions on schedule for 5 years or in a lump sum until the account is paid out. Your retirement contribution credit is simply a deduction you can make to your taxable income based on how much you contribute to a retirement account; it is not affected by the sums you receive in inheritance.

How much tax is paid on 401k after death?

As a beneficiary on a 401k plan after the death of the original owner, you will receive funds in one of two ways. You may receive the account in full in five years' time, or you may inherit the account to be paid out over your lifetime. In either case, you will owe an estate tax for the received funds. You may also owe a distribution tax depending on the methods you elect to receive distributions. For example, if you take over the account for the original beneficiary and hold it for your lifetime, you will have to pay taxes on a deferred basis when you withdraw funds after a minimum qualifying age. 

blog comments powered by Disqus