When you inherit a 401(k), what you can do with the money and how fast you have to take it out depends on your relationship to the person who died. A surviving spouse has the broadest set of choices, including rolling the balance into their own retirement account. Most other individual beneficiaries must empty the account within 10 years. Estates, charities, and most trusts face even tighter timelines. These inherited 401(k) rules come from the federal tax code, and the plan administrator will ask you to pick a distribution path shortly after you file your claim, so it pays to understand your category before you sign anything.
The IRS places beneficiaries into three groups: surviving spouses, designated beneficiaries (any other individual named on the beneficiary form), and non-designated beneficiaries (estates, charities, and certain trusts).1Internal Revenue Service. Required Minimum Distributions for IRA Beneficiaries A smaller carve-out inside the designated beneficiary group, called “eligible designated beneficiaries,” gets better treatment than the rest. One practical warning before you look at any of this: not every 401(k) plan offers every option federal law allows. Some plans force non-spouse beneficiaries to take a lump sum. Read the plan documents or call the administrator before you decide anything, because a direct transfer to an inherited IRA often opens up choices the plan itself won’t give you.
If You Are the Surviving Spouse
Spouses have two real paths, and the right one depends mostly on your age and whether you’ll need the money soon.
Roll It Into Your Own Retirement Account
You can roll the inherited 401(k) into your own IRA or 401(k), and from that point forward the money is treated as if it had always been yours. You take required minimum distributions on your own schedule, which means no mandatory withdrawals until age 73, or 75 if you were born in 1960 or later.2Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) If you’re younger than your spouse was, this stretches tax-deferred growth as long as possible.
The catch: once the money is in your own account, pulling it out before age 59½ triggers the standard 10% early distribution penalty. If you might need to spend some of the inheritance in the next few years and you’re under 59½, rolling it into your own account too soon can cost you.
Keep It as an Inherited Account
You can leave the money in an inherited account instead of making it your own. Distributions from an inherited account are exempt from the 10% early withdrawal penalty regardless of your age.3Internal Revenue Service. Topic No. 558 Additional Tax on Early Distributions from Retirement Plans Other than IRAs You can delay required minimum distributions until the year your late spouse would have turned 73, and when they do start, you calculate them using your own age and the Uniform Lifetime Table, which produces smaller mandatory withdrawals than the Single Life Expectancy Table.
You keep the option to roll the balance into your own IRA later. A common approach for younger surviving spouses: use the inherited account for penalty-free access while under 59½, then roll what’s left into a personal IRA after crossing that age.
The 10-Year Rule for Most Non-Spouse Beneficiaries
If the account owner died after December 31, 2019 and you’re a non-spouse individual who doesn’t fall into the “eligible” subcategory described below, you must empty the account by December 31 of the year containing the 10th anniversary of the owner’s death.4Internal Revenue Service. Retirement Topics – Beneficiary
Whether you also owe annual withdrawals during the 10 years depends on when the owner died relative to their required beginning date (generally April 1 after turning 73):
- If the owner died before their required beginning date, there are no annual withdrawals. You can take out whatever you want when you want, as long as the account is empty by the end of year 10.
- If the owner died on or after their required beginning date, you must take an annual RMD in each of years one through nine and clear the balance by the end of year 10. The IRS finalized this rule in July 2024, and it is fully enforceable starting with the 2025 distribution year after a transitional period of waived penalties ran from 2021 through 2024.5Federal Register. Required Minimum Distributions6Internal Revenue Service. Notice 2024-35
As a non-spouse, you cannot roll inherited 401(k) funds into your own retirement account. You can request a direct trustee-to-trustee transfer into an inherited IRA titled something like “Jane Smith as beneficiary of John Smith,” which preserves tax-deferred status and usually gives you more investment options than the original plan. You cannot do a 60-day indirect rollover the way a spouse can. If a check lands in your hands, that money is distributed and taxable; there’s no do-over.
Even without an annual RMD requirement, draining a traditional 401(k) in year 10 is almost always the wrong move. A single large distribution can push you into a much higher marginal tax bracket for that year. Spreading withdrawals across the decade usually produces a smaller total tax bill.
Eligible Designated Beneficiaries Keep the Stretch
Four groups escape the 10-year rule and can stretch withdrawals across their own life expectancy:4Internal Revenue Service. Retirement Topics – Beneficiary
- A minor child of the account owner, but only until age 21. After that, a 10-year clock starts for the remaining balance. Grandchildren and other minor relatives don’t qualify on age alone.
- A beneficiary who is disabled.
- A beneficiary who is chronically ill.
- A beneficiary who is not more than 10 years younger than the account owner.
If you qualify, annual RMDs must begin by December 31 of the year after the account owner’s death, calculated using the IRS Single Life Expectancy Table.1Internal Revenue Service. Required Minimum Distributions for IRA Beneficiaries Disabled and chronically ill beneficiaries, and those within 10 years of the owner’s age, keep this treatment for life.
If the Beneficiary Is an Estate, Charity, or Trust
When no individual is named, or the named beneficiary is an entity, the timeline tightens.1Internal Revenue Service. Required Minimum Distributions for IRA Beneficiaries
- If the owner died before their required beginning date, the account must be emptied by the end of the fifth year after the year of death.
- If the owner died on or after their required beginning date, distributions are taken over the owner’s remaining single life expectancy using their age in the year of death.
Certain trusts can qualify as “see-through” trusts, which lets the IRS look to the trust’s individual beneficiaries for distribution purposes. The trust must be valid under state law, be irrevocable (or become so at the owner’s death), have identifiable underlying beneficiaries, and a copy must reach the plan administrator by October 31 of the year after the owner’s death. A trust that doesn’t meet those tests defaults to the entity timelines above. This area is narrow and fact-specific, and most people naming a trust as beneficiary should work with an estate planning attorney.
How Distributions Are Taxed
Every dollar you withdraw from an inherited traditional 401(k) is taxed as ordinary income in the year you receive it. The original owner contributed pre-tax dollars and the account grew tax-deferred, so the tax bill falls on whoever takes the money out.
Distributions from an inherited Roth 401(k) are generally tax-free, including investment earnings, as long as the original account was established at least five years before the withdrawal.7Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts The distribution timeline (10 years, life expectancy, or 5 years, depending on your category) still applies even when the money comes out tax-free.
Inherited 401(k) distributions are exempt from the 10% early withdrawal penalty no matter your age, because the distribution is triggered by the owner’s death.8Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions A spouse who rolls the money into their own IRA loses that exemption; later withdrawals from the personal IRA before age 59½ face the standard 10% penalty.
Watch the 20% Withholding Trap
If you take a rollover-eligible distribution and have the plan send the check to you instead of transferring it directly to another institution, the plan administrator must withhold 20% for federal income tax.9GovInfo. 26 USC 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income You get credit for the withholding at tax time, but if you meant to roll the whole balance over, you’d need to make up that 20% out of other pocket to complete the rollover. Whatever you can’t replace becomes a taxable distribution. Always ask for a direct trustee-to-trustee transfer.
What Happens If You Miss a Required Withdrawal
If you take less than your required amount in any year, the IRS charges a 25% excise tax on the shortfall.10Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans The penalty drops to 10% if you fix the shortfall within a two-year correction window and file the right paperwork.11Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
To correct a missed RMD, withdraw the missed amount as soon as you catch the error, then file IRS Form 5329 for the year the distribution was missed. On that form you can ask the IRS to waive the penalty by showing reasonable cause, such as a serious illness, an administrative error by the plan custodian, or incorrect advice from a financial advisor. Attach a written explanation and documentation. The IRS has discretion to waive the penalty entirely if the mistake was reasonable and you’ve taken steps to fix it.
How to Claim the Account
Start by contacting the plan administrator, which is usually the financial institution that holds the 401(k) or the deceased person’s employer’s HR department. You’ll provide a certified copy of the death certificate and complete a beneficiary claim form. Once your status is confirmed, the administrator sends a distribution election package, which is where you formally pick how to handle the funds.
- Surviving spouses can roll the balance into their own IRA, keep it as an inherited account, or take a lump sum.
- Non-spouse designated beneficiaries can request a direct trustee-to-trustee transfer to an inherited IRA, or take distributions from the plan under the 10-year rule or life-expectancy schedule.
- Non-designated beneficiaries follow the 5-year rule or the owner’s remaining life expectancy.
On the election form, specify a direct trustee-to-trustee transfer if you’re moving money to an inherited IRA. For non-spouses, this is the only rollover method the IRS allows, with no 60-day grace period. Also name a beneficiary on whatever new account you open, because if you die before fully distributing the funds, that person becomes a successor beneficiary with their own tight rules.
If You Inherit an Account Someone Already Inherited
Successor beneficiaries don’t restart the clock. The timeline depends on what category the original beneficiary was in:
- If the original beneficiary was a standard designated beneficiary subject to the 10-year rule, you have to empty the account by December 31 of the year containing the 10th anniversary of the original owner’s death. No new 10 years.
- If the original beneficiary was an eligible designated beneficiary, you generally get your own 10-year period measured from the original beneficiary’s death.
If the original beneficiary was taking annual RMDs, you have to keep taking them; RMDs that have started on an inherited account cannot be stopped. If the original beneficiary died partway through a year without taking that year’s RMD, completing it falls to you.
One point that catches surviving spouses off guard: if your spouse was a beneficiary (not the original owner) and you inherit from them, you don’t get the special spousal options. The right to roll inherited money into your own IRA and treat it as your own applies only when you inherit directly from the original account owner.