If you’ve inherited a 401(k), your options depend on a variety of factors, including but not limited to the plan’s rules, your relationship to the account owner (also called the participant), their age at the time of their death, and whether they had already begun taking required minimum distributions (RMDs) prior to their death. Note: RMDs generally start at age 73 but are scheduled to change to age 75 for those born in 1960 or later.
Following are your primary options depending on your beneficiary status. As you consider them, keep in mind that if the account owner was required to take an RMD for the year of their death but hadn't yet done so, you'll be required to receive that distribution by December 31 of the year following the death. Check with the plan administrator for details. You may also want to consult a financial or tax advisor to review what makes sense for your situation.
Options for an inherited 401(k) if you’re a spouse beneficiary
Take a lump-sum distribution
A spouse beneficiary can receive their portion of a 401(k) account as a lump sum, penalty-free. The IRS taxes lump-sum distributions as ordinary income (except for any Roth 401(k) that has met certain requirements1 and non-Roth after-tax contributions), and, depending on the account balance and your income level, this could create a substantial tax bill.
Roll inherited assets into your own retirement account
Spouses can roll assets into their own 401(k) or IRA. If the original account owner had already started taking RMDs, the spouse may choose to continue taking RMDs in an inherited IRA or roll over the 401(k) into an account in their name and follow the RMD rules applicable to account owners. Converting pre-tax funds to a Roth retirement account would be immediate income subject to tax. Consult a tax advisor if you’re considering a Roth conversion.
Effective 2024, a provision of SECURE 2.0 Act also allows a spouse beneficiary to elect to be treated as the deceased employee for RMD purposes and to use the Uniform Lifetime Table to calculate RMDs. (Beneficiaries typically use the Single Life Expectancy Table to do this.) This may benefit a surviving spouse who’s older than the deceased spouse, because the surviving spouse could wait to take RMDs until the deceased spouse would have reached age 73. The surviving spouse could then use the Uniform Life Table, which may provide a longer payment period than the Single Life Expectancy Table. Until then, the funds continue growing tax-deferred.
If the spouse is younger than 59½ and decides to roll funds over into their own retirement account, and then makes withdrawals, they may be subject to a 10% early withdrawal penalty and withdrawals will be taxed as ordinary income (except for qualified Roth withdrawals).2
This option is available only to spouse beneficiaries.
Roll over funds into an inherited IRA
Spouses can roll over inherited 401(k) assets into an inherited IRA. The IRS waives any early withdrawal penalties for inherited IRAs so spouses can withdraw at any time.
If the deceased spouse died before RMDs began, the surviving spouse can choose to wait to make withdrawals. Distributions wouldn't have to begin until the year the deceased spouse would have reached age 73. Unlike most non-spouse beneficiaries, spouse beneficiaries don’t have to draw down the account within a certain amount of time.
Options for an inherited 401(k) if you’re a non-spouse beneficiary
Take a lump-sum distribution
Non-spouse beneficiaries can receive their portion of a 401(k) account as a lump sum with the same guidelines as a spouse beneficiary above. You won’t be penalized, but you will owe taxes on the income. Note: Once a lump sum is taken, the 401(k) balance can’t be rolled over.
Roll over funds into an inherited IRA
Non-spouse beneficiaries can also do a direct trustee-to-trustee transfer of inherited 401(k) funds into an inherited IRA, following rules similar to inheriting someone’s IRA. There are no early withdrawal penalties for owners of inherited IRAs so they can withdraw at any time.
Some rules about this option: First, the non-spouse beneficiary can’t make additional contributions to an inherited IRA. Second, unlike a spouse beneficiary who has a more flexible schedule to empty an inherited IRA, certain non-spouse beneficiaries will need to withdraw all funds in an inherited IRA opened after January 1, 2020, no later than 10 years after the original account owner’s death. If the original owner passed away before they began taking RMDs, the beneficiary can decide how much, if any, to withdraw from the inherited account over the 10-year period, as long as they fully drained the account before the 10 years were up. If the original owner had already begun taking RMDs before they died, the beneficiary may be required to take annual distributions over the 10-year period, with a final withdrawal of any remaining assets by the end of year 10.
As is true for any account subject to RMD rules, the penalty for not emptying the account within 10 years is 25% of the remaining account balance, which can be reduced to 10% if corrected within 2 years.
In addition to a surviving spouse, other eligible designated beneficiaries who don’t have to withdraw within 10 years include a minor child of the account owner, someone who is disabled or chronically ill, or a beneficiary who is not more than 10 years younger than the original IRA owner. These 4 exceptions may be able to take life-expectancy distributions using their remaining life expectancy or the original account owner's remaining life expectancy, whichever distribution period is longer, subject to plan rules.
A minor child has these options, unless the 401(k) plan rules state otherwise:
- Lump-sum distribution
- The 10-year rule, when no money is required to be distributed in years 1 through 9 and the account must be fully distributed in year 10, provided the decedent had not started RMDs
- Life expectancy distributions until age 21, followed by a 10-year distribution period ending with a complete distribution by age 31 (combination life expectancy and 10-year rule)
Note: If you do a trustee-to-trustee transfer of the 401(k) to an inherited IRA, non-spouse beneficiaries don’t have bankruptcy protection unless your state has laws that protect the account from claims by creditors. Speak with an attorney or tax professional before taking any distribution from a retirement account or if you have questions regarding protection from creditors.
What if I inherited a Roth 401(k)?
While the SECURE 2.0 Act eliminated RMDs for Roth 401(k) original account owners, Roth 401(k) beneficiaries must take withdrawals following the applicable post-death distribution requirements based on their beneficiary status.
Unlike the original account owner, a beneficiary generally can't leave inherited Roth 401(k) assets in the account indefinitely. A surviving spouse may have additional options, including rolling inherited Roth 401(k) assets into their own eligible retirement account or transferring them to an inherited Roth IRA.
Options for an inherited 401(k) for both spouse and non-spouse beneficiaries
Leave the money in the plan
Some plans let beneficiaries leave inherited assets in the plan. All plans are different, and spouse and non-spouse beneficiaries must adhere to plan rules and IRS distribution requirements. You should contact the 401(k) plan administrator to find out what distribution options are available to you.
Disclaim, or decline to inherit, all or part of the assets
Beneficiaries can decline to inherit their portion, in which case assets would go to the next eligible beneficiaries. If there are no other beneficiaries or they disclaim as well, the assets may eventually pass to the account owner’s estate and become subject to probate.