Your options for an inherited 401(k) depend almost entirely on your relationship to the person who died. Surviving spouses get the most flexibility, including the ability to roll the money into their own retirement account. Non-spouse beneficiaries, like adult children, are generally required to empty the account within 10 years. Here’s how each path works and what it means for your taxes.
Options for Surviving Spouses
If you inherited a 401(k) from your spouse and you’re the sole beneficiary, you have the widest range of choices. You can roll the funds into your own IRA, treating it as if the money were always yours. This resets the clock on required minimum distributions (the annual withdrawals the IRS eventually requires from retirement accounts) to your own retirement timeline. If you’re younger than the original account holder, this can mean years of additional tax-deferred growth.
You can also keep the money in an inherited account and take distributions based on your own life expectancy. This spreads the tax hit over many years. If the original owner died before reaching the age when they would have been required to start taking distributions (called the “required beginning date”), you have an additional option: you can delay taking any money out until the year the deceased would have turned 72. You can also choose the 10-year rule, which gives you a decade to withdraw everything.
The rollover option is often the most powerful. Once the funds are in your own IRA, you control the timing of withdrawals, you can name new beneficiaries, and the account continues growing tax-deferred. Just keep in mind that if you roll the money into your own IRA and then take a withdrawal before age 59½, the normal 10% early withdrawal penalty applies. By contrast, distributions taken directly from the inherited 401(k) are exempt from that penalty regardless of your age.
Options for Non-Spouse Beneficiaries
If you’re an adult child, sibling, friend, or anyone other than the spouse, your options are more limited. For deaths that occurred in 2020 or later, the SECURE Act requires most non-spouse beneficiaries to withdraw the entire account balance by December 31 of the 10th year after the original owner’s death. You don’t have to take equal amounts each year. You could take nothing for nine years and withdraw it all in year 10, or spread it out however you like. But the account must be fully emptied by that deadline.
Non-spouse beneficiaries cannot roll an inherited 401(k) into their own IRA. You can, however, transfer it into an inherited IRA through a direct trustee-to-trustee transfer. This keeps the money in a tax-advantaged account while you decide on your withdrawal strategy. The 10-year clock still applies, but the inherited IRA may give you more investment options than the employer’s 401(k) plan offered.
One important benefit: distributions from an inherited 401(k) are not subject to the 10% early withdrawal penalty, even if you’re under 59½. You’ll owe income tax on the withdrawals, but you won’t face that extra penalty.
Eligible Designated Beneficiaries Get More Time
A small group of non-spouse beneficiaries qualifies for an exception to the 10-year rule. The IRS calls them “eligible designated beneficiaries,” and they include:
- Minor children of the deceased account holder (but not grandchildren). Once the child reaches the age of majority, the 10-year clock starts.
- Disabled or chronically ill individuals.
- Beneficiaries who are not more than 10 years younger than the deceased, such as a sibling close in age.
If you fall into one of these categories, you can stretch distributions over your own life expectancy rather than being forced into the 10-year window. This can significantly reduce the annual tax burden on large accounts.
How Inherited 401(k) Withdrawals Are Taxed
Distributions from a traditional 401(k) are taxed as ordinary income in the year you receive them. If the account holds $300,000 and you withdraw it all at once, that $300,000 gets added to your other income for the year. Depending on your tax bracket, that could push a significant portion of the money into higher brackets.
This is why withdrawal strategy matters so much. Spreading distributions across multiple years can keep you in a lower bracket each year. If you’re subject to the 10-year rule, think about your expected income over the coming decade. Years when your income is lower, perhaps due to a career change, time off, or early retirement, may be ideal for taking larger distributions. Years when your income is already high might call for smaller or no withdrawals.
If the inherited 401(k) contains Roth contributions (after-tax money the original owner contributed to a Roth 401(k)), those distributions come out tax-free. The 10-year rule still applies to the timeline, but you won’t owe taxes on qualified Roth distributions.
What the Plan Itself Allows
Here’s a detail many beneficiaries miss: the 401(k) plan document controls which distribution options are actually available to you. The IRS sets the outer boundaries of what’s permitted, but individual employer plans can be more restrictive. Some plans require a lump-sum distribution and don’t allow you to keep the money in the account or stretch payments over time. Others may not permit direct transfers to an inherited IRA.
Contact the plan administrator as soon as possible. They’re required to tell you what distribution options the plan offers. If the plan’s options are limited, moving the money into an inherited IRA through a direct trustee-to-trustee transfer (if the plan permits it) generally gives you the most control.
Key Deadlines to Know
If you receive a check directly from the 401(k) plan rather than doing a direct transfer, you have 60 days to deposit it into an eligible retirement account. Miss that window, and the entire amount becomes taxable income for the year. The IRS can grant waivers for circumstances beyond your control, but it’s far simpler to request a direct trustee-to-trustee transfer so the money never passes through your hands.
For the 10-year rule, the deadline is December 31 of the year containing the 10th anniversary of the original owner’s death. If the account holder died on March 15, 2024, every dollar must be out of the account by December 31, 2034.
Lump Sum vs. Spreading It Out
You always have the option to take everything at once. There’s no penalty for doing so (the 10% early withdrawal penalty doesn’t apply to inherited accounts), but the tax consequences can be steep. A $200,000 lump sum added to a $60,000 salary means you’re reporting $260,000 in income for the year.
For most people, taking distributions over several years is more tax-efficient. If you’re a spouse who rolled the funds into your own IRA, you may be able to defer withdrawals for decades. If you’re a non-spouse beneficiary under the 10-year rule, even spreading withdrawals across five or six years can save thousands in taxes compared to a single lump sum. Run the numbers with your actual income before deciding.