When you inherit a 401(k) from a parent, you generally have 10 years to empty the account, and every dollar you pull from a traditional plan is taxed as ordinary income in the year you take it. That is the framework the SECURE Act put in place in 2019, replacing the older rule that let non-spouse beneficiaries stretch withdrawals across their own lifetime. Final IRS regulations issued in July 2024 added a second layer: if your parent had already begun required minimum distributions before death, you owe annual withdrawals during those 10 years as well. The choices you make about timing inside that window can shift tens of thousands of dollars in tax.
The 10-Year Rule
If you are a named beneficiary and you don’t fall into one of the narrow exception categories below, the entire account balance must be withdrawn by December 31 of the year containing the tenth anniversary of your parent’s death.1Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans A parent who died on March 15, 2025 leaves a beneficiary with a December 31, 2035 deadline.
Inside that decade you have real flexibility. You can take nothing for nine years and drain the account in year 10. You can pull equal amounts each year. You can take more in low-income years and skip high-income years. The only hard rule is that the balance hits zero by the deadline. Anything left after triggers an excise tax covered further down.
When Annual Withdrawals Are Also Required
The IRS’s final regulations, effective for distribution calendar years beginning on or after January 1, 2025, resolved years of confusion here. The rule turns on whether your parent had reached their required beginning date (RBD) before death. For 2026, the RBD is April 1 of the year after a person turns 73.2Federal Register. Required Minimum Distributions
If your parent died before their RBD, no annual withdrawals are required. You just need the account empty by the end of year 10. If your parent died on or after their RBD, you must take annual required minimum distributions in years one through nine, calculated using your own life expectancy, and empty whatever remains by the end of year 10.2Federal Register. Required Minimum Distributions
The practical impact is large. A parent who was 80 and already taking distributions leaves a beneficiary who cannot defer the whole balance to year 10. The annual RMDs start the year after death.
Who Escapes the 10-Year Rule
The tax code carves out five categories of “eligible designated beneficiaries” who can still take distributions over their own life expectancy:1Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans a surviving spouse; a minor child of the account owner; a disabled individual as defined by the tax code; a chronically ill individual; and any individual not more than 10 years younger than the deceased.
For an adult child inheriting from a parent, only three of these are even theoretically available: disability, chronic illness, or being close in age to the parent. Most adult children are more than 10 years younger, healthy, and squarely inside the 10-year rule.
The minor-child exception is worth understanding if it might apply to a younger sibling. A minor child of the account owner qualifies as an eligible designated beneficiary and can take life-expectancy distributions, but only until age 21. At 21, the 10-year clock starts, so the account must be emptied by age 31. The exception covers only the account owner’s own children, not grandchildren or nieces and nephews.
How to Move the Money Without Triggering Tax
As a non-spouse beneficiary, you cannot roll an inherited 401(k) into your own IRA or your own 401(k). The only clean path is a direct trustee-to-trustee transfer into an inherited IRA, and the receiving account has to be titled in a specific format: “[Deceased Parent’s Name], deceased, IRA FBO [Your Name], beneficiary.” A wrongly titled account gets rejected by the custodian.
Always request a direct transfer. If the plan cuts a check payable to you instead, the administrator is required to withhold 20% for federal income tax before the check goes out.3eCFR. 26 CFR 31.3405(c)-1 – Withholding on Eligible Rollover Distributions You then have 60 days to deposit the full original amount, including the 20% you never received, into the inherited IRA. Miss it and the entire distribution becomes taxable income.4Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions Coming up with that withheld 20% out of pocket is where indirect rollovers usually blow up. A direct transfer sidesteps the problem.
Open the inherited IRA at a brokerage firm before you contact the plan administrator, so the receiving account is ready when the transfer is processed. The full process typically takes four to eight weeks.
One thing you cannot do: make new contributions to the inherited IRA. It is not your retirement account. Money you add is treated as an excess contribution and hit with a 6% annual penalty until removed.
Planning Your Withdrawals to Reduce Tax
Most 401(k) balances are pre-tax dollars, meaning your parent never paid income tax on the contributions or the growth. Every withdrawal is taxed as ordinary income at your federal and state marginal rates. There is no capital gains treatment, no matter how long the money sat in the account.
This is where the 10-year window becomes a planning tool rather than just a deadline. Say you inherit $500,000 and your salary already places you in the 24% federal bracket. Pulling the whole balance in a single year can push a big slice of the distribution into the 32% or 35% bracket. Spreading withdrawals across the decade keeps each year’s hit smaller. Loading larger withdrawals into low-income years (a job change, an unpaid stretch, a year between careers) compounds the savings.
If your parent died on or after their RBD, you don’t have full flexibility. You have to take at least the annual RMD in years one through nine. But you can still choose to withdraw more than the minimum in years that work for you.
Employer Stock and Net Unrealized Appreciation
If the inherited 401(k) holds shares of your parent’s employer, look at Net Unrealized Appreciation (NUA) before doing anything else. Instead of rolling the stock into an inherited IRA, the beneficiary transfers the shares directly into a taxable brokerage account. Only the stock’s original cost basis is taxed as ordinary income at the time of distribution. The appreciation above that basis is taxed at long-term capital gains rates whenever the shares are eventually sold. With ordinary rates topping out at 37% and long-term capital gains at 20%, the spread matters on stock that has appreciated significantly.
Two catches. NUA requires a lump-sum distribution of the entire plan balance in one tax year. And the treatment is lost the moment the stock is rolled into an IRA, so the decision has to be made before the transfer, not after.
Inherited Roth 401(k) Rules
Roth 401(k) contributions were made with after-tax dollars, so qualified distributions come out tax-free. To be fully tax-free to a beneficiary, the Roth 401(k) has to satisfy a five-year holding period counted from January 1 of the year your parent made their first Roth contribution to that plan. If the account was opened in 2022, the five-year period ends after December 31, 2026. Earnings pulled before the five years are up are taxable.
The 10-year clock still runs. You still must empty the account within a decade. The difference is that the withdrawals themselves cost you nothing in tax (assuming the five-year test is met), which flips the optimal strategy: leave an inherited Roth invested as long as possible, let it grow tax-free, and take it all at the deadline.
What Happens If You Miss a Deadline
Fail to take a required amount, whether an annual RMD or the full balance by the 10-year mark, and the IRS imposes an excise tax of 25% on the shortfall between what you should have withdrawn and what you actually did.5Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans A $200,000 missed distribution means a $50,000 penalty on top of the income tax you still owe once you do take it.
The penalty drops to 10% if you correct the miss during the correction window, which generally runs until the IRS sends a deficiency notice or assesses the tax, and no later than the end of the second tax year after the year the penalty was imposed.5Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans Shortfalls and penalties are reported on IRS Form 5329.6Internal Revenue Service. About Form 5329, Additional Taxes on Qualified Plans
Creditor Exposure After You Inherit
Your parent’s 401(k) was shielded from creditors while they were alive. That protection largely goes away when the money passes to you. In 2014 the U.S. Supreme Court held that inherited IRAs are not “retirement funds” entitled to bankruptcy protection, on the reasoning that the beneficiary cannot add new contributions, must take withdrawals regardless of age, and can drain the account without penalty.7Justia Law. Clark v. Rameker, 573 U.S. 122 (2014) If you are sued or file for bankruptcy, the funds in your inherited IRA can be reached by creditors under federal law.
Some states have enacted their own protections for inherited retirement accounts, but this is not something to assume. If creditor exposure is a real concern, ask an estate planning attorney whether keeping the money inside the original 401(k) (if the plan permits it) is safer than moving it to an inherited IRA. ERISA-governed employer plans generally carry broader federal creditor protections than IRAs.
What to Do First
The order matters. A wrongly titled account or an accidental indirect rollover can trigger tax consequences that are hard to unwind.
- Contact the 401(k) plan custodian (not your parent’s employer) and report the death. The administrator will freeze the account and send a beneficiary claim package.
- Gather a certified death certificate, government-issued photo ID, and the completed beneficiary claim form.
- Open a properly titled inherited IRA at a brokerage firm before submitting the claim, so the receiving account is ready.
- Elect a direct trustee-to-trustee transfer on the claim form. Do not request a check payable to you.
- Find out whether your parent had already begun required distributions. If they had, you owe annual RMDs starting the year after death, calculated on your own life expectancy.2Federal Register. Required Minimum Distributions
- Map your withdrawals across the 10-year window with a tax professional, ideally before the first distribution rather than after.
Give the transfer four to eight weeks. Large plans with heavier paperwork can run longer. Once the inherited IRA is funded, the account is yours to manage, but the 10-year clock is already running from the year of your parent’s death, and the tax bill on every withdrawal is waiting to be shaped by how you time it.