Surviving Spouses Now Have More Rights in 401(k) Plans

Surviving spouses who are beneficiaries of 401(k) accounts have choices similar to those when they inherit IRAs, but there are important differences.

The first step is to contact the plan administrator and determine the options allowed. While the tax code permits several options, a plan doesn’t have to offer all of them.

Historically, 401(k) plans told beneficiaries they had to close the accounts within a fixed time, usually five years. If a beneficiary didn’t act in time, the plan automatically distributed the account balance, which made it fully taxable.

The law changed in recent years to allow plans to offer more options. Many plan sponsors realize the more assets they retain, the easier it is to reduce costs for all members.

If the plan offers all the options, the spouse beneficiary can choose from among the following.

You can take the account in a lump sum distribution. There won’t be a 10% early distribution penalty if you’re younger than 59½, but you’ll be taxed on the distribution just as your spouse would have been. So, all or most of the distribution would be taxable.

Another option is the spousal rollover. You can roll the entire balance to an IRA or 401(k) in your own name, just as you can for an inherited IRA. You treat this as your own original account, not as an inherited account. The rules are the same as for a spousal IRA rollover discussed in the previous article.

As with an IRA, you also have the option to treat the 401(k) as a non-spousal inherited account. You do this by rolling the 401(k) to an inherited IRA. Then, the account is treated the same as an inherited IRA as described in the previous article.

You also can maintain the 401(k) as an inherited account, if the plan allows.

Under this option, when you’re older than 59½ and the deceased already was taking RMDs, you can choose to either maintain the spouse’s distribution schedule or wait to begin RMDs based on your life expectancy when you reach the required beginning age of 73. If you’re at least 73 when inheriting the 401(k), you must begin RMDs based on your life expectancy.

The SECURE Act 2.0 created a new rule that will benefit some spouse beneficiaries. When the spouse beneficiary is between 59½ and 73 and the deceased spouse hadn’t reached 73, you can wait to begin RMDs until the date when the deceased spouse would have been 73. That’s an advantage to someone who is older than the deceased spouse. The RMDs can be delayed a few years until the deceased spouse would have been 73.