Happy National 401(k) Day!
Bookending the first week of September with Labor Day is a less recognized holiday that
deserves more attention from planners, advisors, and savers: National 401(k) Day.
Though we are in an era of generally declining economic confidence, many Americans are still
somewhat upbeat about their retirement savings. However, how they feel about their retirement
may not match what is actually in their 401(k) accounts. National 401(k) Day is an ideal
opportunity to help clients take stock and ensure that their plans keep pace with their
expectations - for both themselves and their loved ones.
The State of 401(k) Plans in 2025
The 401(k) has become one of the most essential vehicles for building and transferring wealth in
America.
As a product of late 20th-century tax policy that shifted retirement savings from employers to
individuals, today roughly 6 out of 10 Americans say that they have a 401(k) or similar
employer-sponsored defined contribution plan.1 In 2025, the average 401(k) balance for
Americans across all age groups is $315,820, but this amount varies widely.2
Vanguard data shows that workers earning $75,000-$99,999 annually have a median balance
of $53,112 in retirement savings, nearly double that of those earning $50,000-$74,999
($27,528).3 Age matters as well: Empower reports that median balances for workers in their 40s
($158,093) are more than double those for workers in their 30s ($77,546),4 underscoring the
power of compounding growth and saving early and consistently. Yet planning gaps remain. A
recent Allianz survey found that only 55 percent of Americans say that they are saving enough
for retirement.5
Just as relatively few people feel confident that they are doing enough to financially prepare for
retirement, even fewer have created an estate plan. Roughly double the number of people (6 in
10)6 have some type of retirement account than the number of people who have an estate plan
(1 in 3).7
And while retirement savings goals are relatively intuitive and straightforward, ideas such as
growth rates, savings, and spending; estate planning issues such as the use of trusts; and
Internal Revenue Service (IRS) rules for 401(k) beneficiaries can feel far more complex for your
clients. However, they are just as critical to planning for their long-term security.
Passing on a 401(k): Outright or in Trust?
Retirement accounts and a primary residence are among the most valuable assets owned by
US households.8 However, the rules related to transferring each of these after death are very
different and call for distinct planning strategies.
Clients may assume that because they filled out a beneficiary form when they established their
401(k), there is nothing more they need to do. However, a great deal may have changed since
then in terms of their life circumstances, their financial situation, and their beneficiaries' lives.
Their form may be out of date and list someone they no longer want as a beneficiary, such as
an ex-spouse or estranged child. They also may not understand that this simple way to pass on
their account may not offer the most protection for their beneficiaries.
An outright inheritance (such as when someone is named on a beneficiary form) gives
the beneficiary immediate and unrestricted access to the full account balance.
That approach may work well for financially responsible adult beneficiaries with no creditor
concerns or divorce risk. However, what if the beneficiary is a minor, a young adult, or someone
with a history of poor financial management? What if they have creditor issues or special needs
that make direct inheritance risky?
Instead of directly naming individuals as beneficiaries of a retirement account, your clients can
name a trust. After the account owner's death, the retirement account transfers to the trust,
where it is held and administered according to the trust's terms for beneficiaries named in the
trust. This approach can add an extra layer of protection and flexibility for their loved ones - and
an extra layer of control for your clients. However, before helping clients name a trust as a
beneficiary of their retirement account, it is important to understand that not all trusts are
created equal.
Conduit and Accumulation Trusts for 401(k) Accounts
When the Setting Every Community Up for Retirement Enhancement (SECURE) Act came into
effect in 2020, the rules for passing retirement accounts at death changed radically. Under
current law, if a trust (such as a revocable living trust or a standalone retirement trust) named as
the beneficiary of a retirement account does not qualify as a see-through trust, the account must
be paid out within five years, often the least favorable option. A see-through trust meets specific
IRS requirements, allowing beneficiaries to be treated as if named directly and enabling more
favorable payout timelines, usually 10 years. Therefore, the first step in retirement account
planning with trusts is to ensure that the trust qualifies as a see-through trust.
Once it is established that a trust qualifies as a see-through trust, the next key decision is
whether it will be structured as a conduit trust or an accumulation trust, each of which handles
retirement account distributions differently.
Conduit Trust: The Pass-Through Option
With a conduit trust, any funds withdrawn from the 401(k) by the trustee must immediately flow
through the trust to the beneficiary within the same calendar year as the withdrawal. The trust
cannot hold or reinvest the funds in the trust for the beneficiary's benefit. Here are some of the
features and effects of a conduit trust:
- The beneficiary pays tax. Withdrawn funds are taxed at the beneficiary's personal income
rate rather than at the trust's tax rate.
- Limited control and protection. Once the funds have been distributed, the trustee has no
say over how the beneficiary uses them, and the money loses the trust's protection from the
beneficiary's creditors, predators, and potential divorces.
- The trustee decides when to take withdrawals. Generally, for most nonspouse
beneficiaries, the entire balance of the 401(k) must be paid out within 10 years of the
account owner's death. The 10-year rule applies whether the client's chosen beneficiary is
directly named on the beneficiary designation form or inherits indirectly through a seethrough trust. However, a major drawback to directly naming an individual as the beneficiary
is that nothing prevents them from liquidating the retirement account before the applicable
deadline - whether in large withdrawals or a single lump sum. Since all withdrawals from a
401(k) are subject to income tax, spreading them out over time is generally a better tax
strategy that helps manage the tax burden while also reducing the risk of the beneficiary's
mismanagement. A conduit trust can help prevent the beneficiary from withdrawing the
entire account all at once by placing withdrawal decisions in the trustee's hands. The trustee
can make withdrawals thoughtfully and possibly over time, considering income tax
consequences and the client's wishes regarding the timing and amounts of distributions
made to the beneficiary.
Accumulation Trust: The Discretionary Holding Tank
While retirement funds must still be withdrawn in accordance with the 10-year rule (for most
nonspouse beneficiaries), an accumulation trust allows the trustee to decide whether to
distribute those withdrawals to the beneficiaries or retain them in the trust, allowing for long-term
management and greater protection for beneficiaries.
- The trustee decides. The trustee controls the timing and amount of the withdrawals from
the retirement account (subject to the SECURE Act's limits) and the timing and amount of
distributions from the trust to the beneficiary.
- The trust pays tax (if funds are retained). Withdrawals from retirement assets that remain
in the trust beyond the calendar year in which they are taken are taxed at the trust's
compressed income tax rates. If the funds are distributed to the beneficiary within that
calendar year, the beneficiary is responsible for the income tax.
- Stronger asset protection. Funds kept in the trust stay shielded from creditors, lawsuits, or
reckless spending, which may align with your client's overall estate planning goals.
- SECURE Act and 10-year rule. Subject to the limits of the SECURE Act, the trustee can
often strategically spread withdrawals from the retirement account over the 10-year period to
manage tax impacts and avoid a single large payout, all without having to immediately
distribute those funds to the beneficiary. This flexibility makes accumulation trusts a
preferred option for minor children, spendthrifts, or loved ones with special needs.
National 401(k) Day: A Labor of Love
It may not get the fanfare of Labor Day, but National 401(k) Day deserves some love as families
celebrate summer's end. They are enjoying life now, but what about 10, 20, or even 50 years
down the line?
The right trust can help clients overcome natural blind spots around long-term planning only if it
is drafted with precision. Post-SECURE Act, even small missteps can trigger accelerated
distributions and hefty tax bills. To learn more about planning strategies for your clients'
retirement accounts, call us.
MEREDITH | PC
4325 Windsor Centre Trail
Suite 400
Flower Mound Texas 75028
214-513-1013
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
You have received this newsletter because I believe you will find its content valuable. Please feel free to Contact Me if you have any questions about this or any matters relating to estate planning.
