You filled out the beneficiary form for your 401(k) years ago. Perhaps when your children were young, your marriage was new, or you had just started a job. Since then, life has changed. The form may not have.
If something happened to you, your beneficiary might inherit more than an account balance. They would also inherit a schedule for withdrawing the money, and, with a traditional retirement account, a tax bill on the withdrawals. The choices you make now can affect how long the account has to keep growing tax-deferred and how quickly your beneficiary must recognize taxable income.
The beneficiary designation generally controls who receives the account, even if your will says something different. Read more about how beneficiary designations and wills interact.
Here, the focus is what happens next: the retirement-account rules that shape the payout and tax timing.
Three beneficiary categories, and three different timelines
The usual payout period depends on the kind of beneficiary you name. The details can vary based on the plan document, whether you had reached your required beginning date for required minimum distributions (RMDs), and each beneficiary's circumstances.
Nonhuman beneficiary (a charity, your estate, or a trust that does not qualify for special treatment): usually five years if you die before your required beginning date; otherwise, over your remaining life expectancy.
Designated beneficiary (most individuals, including most adult children): usually 10 years; annual withdrawals may also be required in years one through nine if you had begun RMDs.
Eligible designated beneficiary (your surviving spouse; your minor child until age 21; a disabled or chronically ill beneficiary; or someone not more than 10 years younger than you): generally based on the beneficiary's life expectancy; a minor child generally moves to a 10-year payout period at age 21.
These are general timeframes, not guarantees. Account type, plan terms, your date of death relative to your required beginning date, and individual circumstances can affect the rules that apply.
What the 10-year rule means for adult children
For many families, the beneficiary is an adult child. The usual rule gives that child 10 years to empty the inherited account. That does not necessarily mean the child can wait until the final year to take everything out.
Under current IRS final regulations, beneficiaries who inherit from an owner who had already begun RMDs generally must take annual withdrawals starting in 2025, as well as empty the account by the end of year 10. In other words, the 10-year deadline may come with annual withdrawal requirements along the way.
Missing a required withdrawal can trigger an excise tax of up to 25% of the shortfall. The tax may be reduced if the missed withdrawal is corrected promptly. The rules can be technical, so a beneficiary should confirm the requirements for the specific account rather than assume the deadline is the only obligation.
For a traditional retirement account, withdrawals are generally taxable income to the person who receives them. Taking large withdrawals in a short period may push a beneficiary into a higher income-tax bracket. Smaller withdrawals spread over more years may help manage that tax burden, and money left in the account may continue growing tax-deferred until it is withdrawn.
That does not mean every beneficiary should wait as long as possible. Their income, needs, other tax considerations, and account rules all matter. But understanding the available time can help your family avoid an unnecessary rush.
Why a spouse may have more choices
A surviving spouse is an eligible designated beneficiary and usually has more flexibility than other beneficiaries. In many cases, a spouse can roll the inherited account into their own name. The right option depends on the spouse's circumstances and the plan or account rules.
There is also an important distinction between workplace retirement plans and IRAs. Workplace plans governed by ERISA, such as many 401(k)s, generally require a married participant to name their spouse as the primary beneficiary. To name someone else, the spouse typically must provide written, notarized consent after the marriage.
A prenuptial agreement alone usually does not satisfy this consent requirement. IRAs generally are not subject to the same federal spousal-consent rule.
If you are married and considering naming someone other than your spouse on a workplace plan, check the plan's requirements before making a change. The form may not take effect as you intend without the proper consent.
Naming a trust requires careful drafting
A trust can help families manage and protect inherited assets, but naming "a trust" as beneficiary does not automatically provide a longer payout period. By default, a trust may be treated as a nonhuman beneficiary, which can mean a shorter payout timeframe.
A trust drafted to qualify as a see-through trust may receive more favorable treatment. The outcome depends, among other things, on who the trust's countable beneficiaries are and how the trust handles distributions:
A conduit trust generally directs retirement-account distributions straight to the beneficiary.
An accumulation trust can retain distributions in the trust for protection, but that choice may affect how the beneficiary rules apply.
There is no one-size-fits-all answer. A trust can offer meaningful safeguards, but its provisions should be coordinated with the retirement account and the goals for the people who may inherit it. If your trust was written before 2020, ask an experienced estate planning attorney to review it; the rules changed substantially.
Could a Roth conversion help your family?
A Roth conversion means moving money from a traditional retirement account into a Roth account and paying income tax on the amount converted. It may be worth discussing if you can pay tax in a year when your tax bracket is lower than your beneficiaries' may be, but the result depends on your full financial and tax picture.
Withdrawals from an inherited Roth account are generally not subject to income tax because tax was paid when the money went into the account. Account-specific rules and individual circumstances still matter.
For Maryland residents, there may be another estate-planning consideration. Retirement accounts count toward Maryland's $5 million estate tax exemption at their full pre-tax balance. If an estate is above that threshold, the account's pre-tax value may be relevant to Maryland estate tax even though a beneficiary will also pay income tax on withdrawals from a traditional account.
With a Roth conversion, the tax paid on the converted amount leaves the estate. That may reduce the value included in the estate for Maryland estate-tax purposes. It does not guarantee a particular tax result, and conversion decisions should be considered with your CPA or tax advisor.
Bring the beneficiary form into the bigger plan
A common mistake is treating beneficiary forms as paperwork to complete once and forget. A more thoughtful approach reviews those forms alongside your will or trust, your family circumstances, and your tax picture.
Consider reviewing them after a marriage, divorce, birth, death, or other major change. Then coordinate the review with an experienced estate planning attorney, your financial advisor, and your CPA. Together, they can help you consider the beneficiary category, likely payout timeframe, income-tax consequences, and whether a trust or Roth conversion belongs in the discussion.
Start with a conversation
The right beneficiary choice is personal. It should reflect who you want to protect, how much control or support they may need, and how the account fits into your wider estate plan.
At Pillar Oak Law Firm, we start with a complimentary 15-minute First Conversation. It is a chance to share what is on your mind, ask questions, and understand what next steps may make sense. You do not have to sort through every account rule alone.
To speak with Jasen Adams, book a First Conversation →
Pillar Oak Law Firm has offices in Annapolis, Columbia, Rockville, and Towson.
A thoughtful review today can give your family more clarity about what you intend, and help them understand what to do when the time comes.
This article is for educational purposes only and is not legal, financial, or tax advice. Retirement account and tax rules depend on the plan document and individual circumstances. Consult an experienced estate planning attorney and your tax and financial advisors about your situation.
