Whether a pension can be inherited depends on the type of pension and the rules set by the plan

Some pensions pass to a surviving spouse or named beneficiary after the account holder dies. Others stop paying entirely when the person dies, leaving nothing for heirs. The difference comes down to what kind of pension it is, what choices the person made while alive, and what the plan's rules allow. A defined benefit pension (the kind many government and union workers have) often includes survivor options. A defined contribution plan like a 401(k) or IRA almost always allows you to name a beneficiary who inherits the balance. But a traditional pension annuity with no survivor option may pay out nothing after death.

The person who owned the pension usually decides during their lifetime whether to set up inheritance. They choose between taking a larger monthly payment that stops at death, or a smaller payment that continues to a spouse or other beneficiary. Once they start receiving payments, that choice is locked in and cannot be changed. If they never made a choice, the plan's default rules determine what happens — and those defaults vary widely.

Key Takeaways

  • Defined benefit pensions often offer survivor options that let the account holder choose to leave money to a spouse, but the monthly payment is smaller if they do.
  • Defined contribution plans like 401(k)s and IRAs allow you to name any beneficiary, and that person inherits the full remaining balance when you die.
  • Pension annuities that have already started paying out usually cannot be changed, so if the person chose a single-life option, the payments stop at death.
  • If no beneficiary is named or no survivor option was chosen, the money may go to the estate or revert to the plan, depending on the plan rules.
  • Inherited pensions and retirement accounts have different tax rules for spouses versus other beneficiaries, and the rules changed significantly in 2020.

How defined benefit pensions handle death and survivors

A defined benefit pension is a monthly payment for life, usually from a government employer, union, or large corporation. Before the person starts receiving payments, they typically choose a payout option. The most common choice is between a single-life annuity (larger monthly payment, nothing to heirs) and a joint-and-survivor annuity (smaller monthly payment, continues to spouse after death).

If they choose joint-and-survivor, the surviving spouse usually receives either 50 percent or 75 percent of the monthly payment for the rest of their life, depending on what the plan offers. This choice is made before payments begin and cannot be changed later. If the person dies before starting to receive payments, most plans allow the surviving spouse to receive a lump sum equal to what was contributed, though some plans have different rules.

If the person chose single-life and dies, the pension stops. No money goes to heirs unless the plan has a may provide period — a promise to pay out for a set number of years even if the person dies. A may provide period of 10 years, for example, means if the person dies after receiving payments for 3 years, the beneficiary gets 7 more years of payments. Not all plans offer this, and the length varies.

Defined contribution plans and named beneficiaries

A 401(k), 403(b), or similar defined contribution plan works differently. The account has a balance — money that belongs to the account holder — and that balance passes to whoever they named as beneficiary. The beneficiary receives the full remaining balance when the account holder dies, regardless of when that happens.

The account holder can name anyone as beneficiary: a spouse, adult child, parent, friend, or charity. They can name multiple beneficiaries and decide what percentage each one receives. If they never named a beneficiary, the money goes to their estate, which can delay things and create tax complications. Changing the beneficiary is simple — usually a form to the plan administrator — and can be done at any time.

Traditional and Roth IRAs work the same way. The account holder names a beneficiary, and that person inherits the balance. If no beneficiary is named, the money goes to the estate.

Tax rules for people who inherit retirement accounts

How much tax a beneficiary owes on an inherited retirement account depends on whether they are a spouse and what type of account it is. A surviving spouse can roll an inherited traditional 401(k) or IRA into their own account and delay withdrawals until they reach age 73 (the current required minimum distribution age). They pay income tax only when they withdraw money, just as if it were their own account.

Non-spouse beneficiaries face stricter rules. Under the SECURE Act, which took effect in 2020, most non-spouse beneficiaries must withdraw the entire inherited account within 10 years and pay income tax on those withdrawals. The exception is a beneficiary who is disabled, chronically ill, less than 10 years younger than the account holder, or a minor child (who gets until age 26). These rules changed significantly in 2020, so inherited accounts from people who died before that date may follow older rules.

An inherited Roth IRA has the same withdrawal timeline for non-spouses, but withdrawals are tax-free because the original owner already paid tax on the contributions.

What happens if no beneficiary was named

If the account holder never named a beneficiary on a 401(k), IRA, or defined contribution plan, the money goes to their estate. The estate is then distributed according to their will, or if there is no will, according to state law. This process can take months and may involve probate court, which is public and can be expensive.

For defined benefit pensions, if no survivor option was chosen and no beneficiary was named, the plan's default rules apply. Some plans return contributions to the estate. Others pay nothing. The pension administrator can tell you what the default is for that specific plan.

Naming a beneficiary directly on the account avoids probate and gets money to heirs faster. It also keeps the account private — probate records are public, but beneficiary designations are not.

Inherited IRAs and the 10-year rule

When a non-spouse beneficiary inherits a traditional or Roth IRA, they must withdraw all the money within 10 years of the account holder's death. They can withdraw it all at once, spread it out over the 10 years, or wait until year 10 and take it all then. The choice is theirs, but the account must be empty by the end of year 10.

The beneficiary does not have to take equal amounts each year. They can take nothing for 9 years and withdraw everything in year 10, or take small amounts each year. The only requirement is that the full balance is gone by the deadline. If they miss the deadline, they owe a 25 percent penalty on any money still in the account (reduced to 10 percent if they withdraw it within two years of missing the deadline).

A surviving spouse who inherits an IRA can treat it as their own, which means they do not have to follow the 10-year rule. They can leave the money in the account until they reach age 73, when required minimum distributions begin.

Pension inheritance and divorce

If the account holder was divorced, the ex-spouse's rights depend on what the divorce decree says and what state law allows. In some cases, a divorce order can require that a portion of the pension go to the ex-spouse as part of the settlement. This is done through a may have access to Domestic Relations Order (QDRO), a court order that tells the pension plan to pay part of the benefit to the ex-spouse.

A QDRO can name the ex-spouse as a beneficiary for survivor benefits, or it can award them a share of the account balance. The ex-spouse's rights are separate from whoever the account holder names as the current beneficiary. If a QDRO is in place, the plan follows it regardless of what the account holder's beneficiary designation says.

If you are divorced and think a QDRO might apply to your situation, ask the pension plan administrator for a copy of any QDRO on file. You can also ask your divorce attorney or contact your state's family court.

How to find out what will happen to a pension after death

The pension plan administrator is the only source for definitive answers about what happens to a specific pension. They can tell you whether a survivor option is available, what the monthly payment reduction would be, what the current beneficiary designation is, and what the default payout is if no choice was made.

For a defined benefit pension, contact the plan administrator or the human resources department of the employer. For a 401(k) or IRA, contact the financial institution that holds the account. They can provide a summary of plan rules and help you understand your options.

If the account holder has already died and you are trying to find out whether you inherit anything, start by looking for pension statements or account statements in their papers. These usually list the plan administrator's contact information. You can also check with their employer's HR department or call the Social Security Administration, which may have information about pensions.

Frequently Asked Questions

Can I change my pension beneficiary after I start receiving payments?

For a defined contribution plan like a 401(k) or IRA, yes — you can change your beneficiary at any time by contacting the plan administrator. For a defined benefit pension that has already started paying out, no — the survivor option you chose is locked in and cannot be changed. If you chose single-life, you cannot later add a survivor. If you chose joint-and-survivor, you cannot remove the survivor.

What if I inherit a pension from someone who was not my spouse?

For a defined contribution plan, you inherit the account balance but must withdraw it within 10 years and pay income tax on the withdrawals. For a defined benefit pension, you receive survivor benefits only if the account holder chose a survivor option that named you, or if a court order (QDRO) requires it. Otherwise, you receive nothing.

Do I have to take the inherited money all at once?

For a defined contribution plan, you can take it all at once or spread withdrawals over the 10-year period — the choice is yours. For a defined benefit pension with survivor benefits, you receive the monthly payment for life; you cannot take a lump sum. Some plans offer a lump-sum option instead of monthly payments, but that is the account holder's choice to make before they die, not yours.

What happens to my pension if I die before I start receiving payments?

For a defined benefit pension, most plans return your contributions to your beneficiary or estate. Some plans offer a death benefit equal to your accrued pension value. For a defined contribution plan, your beneficiary inherits the full account balance. Contact your plan administrator to find out what your specific plan provides.

Can my creditors take money from an inherited pension?

In most cases, no. Inherited IRAs and retirement accounts have some protection from creditors under federal law, though the level of protection varies by state and by the type of creditor. Inherited defined benefit pensions generally cannot be taken by creditors. If you are concerned about this, speak with an attorney in your state about what protections apply to your situation.