Inherited 401(k) Distribution Rules: 10-Year Rule, Taxes, and Penalties

When you inherit a 401(k), federal law sorts you into one of three beneficiary categories, and that category dictates how quickly you must empty the account and whether you owe annual withdrawals along the way. The inherited 401(k) distribution rules changed significantly under the SECURE Act of 2019, which eliminated the old “stretch” strategy for most heirs and replaced it with shorter deadlines backed by a 25 percent excise tax on any required amount you fail to take.¹ One caveat before you plan around any rule below: the plan document itself may restrict which options are actually offered. Even when the IRS permits a path, the plan is not obligated to make it available. Ask the plan administrator first.

Which Beneficiary Category You Fall Into

The IRS framework recognizes three groups, and your group controls every other decision.²

Eligible designated beneficiaries (EDBs): surviving spouses, the account owner’s minor children (under 21), individuals who are disabled or chronically ill, and anyone not more than ten years younger than the deceased. This group has the most flexibility, including life-expectancy withdrawals in many cases.
Designated beneficiaries: individual people who don’t qualify as EDBs — most commonly adult children, siblings, or friends. This group follows the ten-year rule.
Non-designated beneficiaries: entities such as estates, charities, and trusts that don’t meet the IRS “see-through” requirements. The SECURE Act’s ten-year rule does not apply here; the older pre-2020 rules do.

The Ten-Year Rule and Whether You Owe Annual Withdrawals

If you’re a designated beneficiary who isn’t eligible, you must withdraw the entire balance by December 31 of the tenth year after the year of death.² Whether you also owe annual withdrawals during that decade hinges on one fact: had the original owner already started taking required minimum distributions (RMDs) before dying?

If the owner died before their required beginning date (April 1 of the year after turning 73), no annual withdrawals are required during the ten years. You can take money whenever it makes tax sense and drain the balance in year ten if you want. Pulling larger amounts in years when your other income is low can keep you in a lower bracket.

If the owner died on or after their required beginning date, the rules tighten. Final Treasury regulations issued in 2024 confirmed that annual RMDs are required in each year of the ten-year window under the “at least as rapidly” rule, and the remaining balance still has to be out by the end of year ten.³ Missing any of those annual withdrawals triggers the excise tax.

The IRS waived excise taxes on those missed annual RMDs for tax years 2021 through 2024 when the original owner had died in 2020 through 2023 after their required beginning date.⁴ That relief is gone. Starting with 2025 distributions, the annual RMD requirement inside the ten-year period is fully enforced.

Options for Surviving Spouses

A surviving spouse has more paths than any other beneficiary, and each path creates different trade-offs around tax timing and penalty-free access.²

Spousal rollover. Move the inherited 401(k) into your own IRA or 401(k). The money is treated as always having been yours, so RMDs don’t start until you reach your own required beginning date. The catch: if you’re under 59½ and need to withdraw, the 10 percent early withdrawal penalty applies.
Remain as beneficiary. Keep the funds in an inherited account. You can delay distributions until the year the deceased would have turned 73, and withdrawals at any age are exempt from the early withdrawal penalty. This is often the better choice for younger surviving spouses who may need the funds before 59½.
Section 327 election under SECURE 2.0. A newer option that lets a surviving spouse be treated as the deceased employee for RMD purposes. When the owner died before their required beginning date, this allows life-expectancy withdrawals over the survivor’s own life using the Single Life Table without a full rollover. When the owner died after that date, the spouse can use the more favorable Uniform Lifetime Table.

For a younger spouse who doesn’t need immediate income, the rollover usually maximizes tax-deferred growth. For an older spouse, or one who wants penalty-free access before 59½, staying as a beneficiary is typically smarter.

Minor Children and Other Eligible Beneficiaries

A minor child of the account owner (not a grandchild) qualifies as an EDB and can stretch withdrawals over their own life expectancy while under 21. At age 21, the ten-year clock starts, and the account must be empty by age 31.²

Other EDBs — disabled or chronically ill individuals, and people not more than ten years younger than the deceased — can use life-expectancy withdrawals for their entire lives. Annual amounts are calculated using the IRS Single Life Table in Publication 590-B.⁵ When an EDB later dies, the successor beneficiary falls under the ten-year rule.

When a Trust, Estate, or Charity Is the Beneficiary

If the account names an estate, a charity, or a trust that doesn’t meet IRS requirements, the account is treated as having no designated beneficiary. The ten-year rule doesn’t apply. The older pre-2020 rules do:²

Owner died before their required beginning date: the entire account must be emptied by the end of the fifth year after the year of death, with no annual withdrawals required in between.
Owner died on or after their required beginning date: distributions can be spread over the deceased owner’s remaining life expectancy.

The compressed five-year timeline often produces a larger tax hit than the ten-year rule available to individuals.

See-Through Trusts

A trust can qualify as a “see-through” trust, letting the IRS look through it and treat the trust’s individual beneficiaries as the designated beneficiaries. Four requirements: the trust must be valid under state law, irrevocable (or become so upon the owner’s death), have identifiable beneficiaries, and provide the required documentation to the plan administrator.⁶ Documentation is either the trust itself or a list of all beneficiaries detailed enough to establish each person’s entitlement. When the trust qualifies, the individual beneficiaries’ classifications drive the timeline under the same EDB framework. When it doesn’t, the trust is stuck with the five-year rule or the deceased owner’s remaining life expectancy.

How Inherited 401(k) Distributions Are Taxed

Every dollar you take from an inherited traditional 401(k) counts as ordinary income in the year received, taxed at your marginal rate.² No capital gains treatment. No step-up in basis. A large lump-sum withdrawal can easily push you into a higher bracket, which is why spreading distributions across years usually saves money when the rules permit it.

One real advantage: inherited 401(k) distributions are exempt from the 10 percent early withdrawal penalty regardless of your age. If you’re 35 and inherit a parent’s 401(k), you can withdraw penalty-free. This applies to all beneficiaries, not only spouses.

Roth 401(k) distributions get better treatment. If the account met the five-year aging requirement before the owner’s death — meaning the first Roth contribution was at least five years before the withdrawal — both contributions and earnings come out tax-free. If the account is younger than five years, the earnings portion may be taxable. Verify the first-contribution date with the plan administrator.

Most states also tax inherited 401(k) distributions as ordinary income, with rates reaching 13.3 percent in the highest-tax states. Nine states have no income tax, and some offer partial exemptions for retirement distributions. Build state treatment into any decision about lump-sum versus multi-year withdrawals.

If You Miss a Required Distribution

The excise tax on a missed required distribution is 25 percent of the shortfall. Catch it and take the missed amount within two years, and the penalty drops to 10 percent.¹

With a legitimate reason, the IRS can waive the penalty entirely. You request the waiver on Form 5329 with a written explanation showing the shortfall was due to reasonable error and that you’re fixing it. You calculate the tax on the form but enter “RC” with the waiver amount on the relevant line. The IRS will notify you if the waiver is denied.⁷ Situations that have qualified include reliance on incorrect advice from a plan administrator, not knowing you were a beneficiary, and genuine confusion during the SECURE Act transition. The IRS was relatively generous during the transition; that grace period is over.

Claiming the Account

Start by notifying the plan administrator of the death. You’ll typically need a certified copy of the death certificate and the plan’s beneficiary claim forms, which ask for your Social Security number, proof of identity, and bank details for electronic transfer.

Once your claim is processed, choose a distribution method from what the plan offers:

Direct rollover to an inherited IRA. Funds transfer directly between institutions, so nothing is withheld at transfer. An inherited IRA at a brokerage of your choice often gives you more investment options than the original plan. Non-spouse beneficiaries must roll into an inherited IRA titled in the deceased’s name for your benefit, not into their own retirement account.
Remain in the plan. Some 401(k) plans let beneficiaries keep the money in the original plan and take distributions on schedule. Not all do.
Lump-sum distribution. The plan sends the full balance. The administrator must withhold 20 percent for federal income tax on any eligible rollover distribution that isn’t rolled over directly. Depending on your actual bracket, you may owe more or get a refund at filing.⁸

If multiple beneficiaries are named on one account, each should establish a separate inherited account by December 31 of the year after the year of death. Miss that deadline and distributions are calculated using the oldest beneficiary’s life expectancy, which shortens the timeline for younger heirs. If the employer is small or has been acquired and you can’t find the administrator, the Department of Labor’s abandoned plan search and the former employer’s HR department are the places to start.

1
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
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Internal Revenue Service. Retirement Topics – Beneficiary
3
Federal Register. Required Minimum Distributions
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Internal Revenue Service. Notice 2024-35
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Internal Revenue Service. 2025 Publication 590-B
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Internal Revenue Service. Internal Revenue Bulletin 2024-33
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Internal Revenue Service. Instructions for Form 5329
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Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions