Inherited 401(k) Rules: Beneficiaries, Taxes, and Deadlines

The inherited 401(k) rules that apply to you depend on one thing above all: your relationship to the person who died. A surviving spouse has the widest set of choices, including rolling the account into their own IRA. Most other individual beneficiaries must empty the account within 10 years. Estates and most trusts face even shorter windows. Every withdrawal from an inherited traditional 401(k) is taxed as ordinary income the year you take it, and missing a required distribution carries a 25% excise tax on the shortfall.

Beneficiary Category Controls Your Choices

The IRS sorts beneficiaries into three groups, and your group controls which distribution methods are available, how long the money can keep growing tax-deferred, and whether annual withdrawals are required along the way.¹

Surviving spouse: the husband or wife of the account owner.
Designated beneficiary: any other individual named on the plan’s beneficiary form, such as an adult child, sibling, or friend. Most fall under the 10-year rule.
Non-designated beneficiary: an estate, charity, or trust that doesn’t meet the see-through requirements. These face the most compressed timelines.

A subset of designated beneficiaries gets preferential treatment. You qualify as an eligible designated beneficiary if you are a minor child of the account owner (until age 21), disabled, chronically ill, or not more than 10 years younger than the account owner.² Eligible designated beneficiaries can stretch withdrawals across their own life expectancy instead of being forced into a 10-year window.

One practical caveat before you make any elections: not every 401(k) plan offers every distribution option the tax code allows. Some plans require non-spouse beneficiaries to take a lump sum and won’t let you hold an inherited account inside the plan. If the plan’s terms are too restrictive, a direct transfer to an inherited IRA usually opens up more flexibility. Check the plan documents or call the administrator first.

What a Surviving Spouse Can Do

Spouses have more control than any other beneficiary, and the choice you make has real long-term consequences for how long the money can grow tax-deferred.

Roll It Into Your Own Retirement Account

The most common move is rolling the inherited 401(k) into your own IRA or 401(k). Once you do, the money is treated as if it were always yours. You follow the normal RMD schedule based on your own age, meaning no mandatory withdrawals until you turn 73 (or 75 if you were born in 1960 or later).³ The rollover should be a direct trustee-to-trustee transfer to avoid mandatory withholding.

The tradeoff: once the funds are in your own account, withdrawals before age 59½ trigger the standard 10% early distribution penalty. That matters for younger surviving spouses who might need access to the money soon.

Keep It as an Inherited Account

You can also leave the funds in an inherited account rather than making them your own. This lets you take penalty-free distributions at any age, which is the main advantage for spouses under 59½.⁴ Required distributions can be delayed until the year your deceased spouse would have turned 73. When RMDs do begin, 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. Many younger spouses use the inherited account as a bridge: take penalty-free distributions while under 59½, then roll the remainder into their own IRA once they cross that age.

The 10-Year Rule for Most Non-Spouse Beneficiaries

If you inherited from someone who died after December 31, 2019, and you’re a non-spouse designated beneficiary who doesn’t qualify as eligible, the 10-year rule applies. The entire account balance must be withdrawn by December 31 of the year containing the 10th anniversary of the account owner’s death.²

Whether you also owe annual withdrawals during the 10-year window depends on when the account owner died relative to their required beginning date (generally April 1 after they turned 73):

Death before the required beginning date: no annual withdrawals required. You can take money out whenever you want during the decade as long as the account is empty at the end of year 10.
Death on or after the required beginning date: you must take annual RMDs in years one through nine, with the remaining balance distributed by the end of year 10. The IRS finalized this requirement in July 2024, effective for the 2025 distribution year and beyond. The agency had waived penalties for missed annual RMDs from 2021 through 2024 while the rules were being finalized, but that transitional relief has ended.⁵⁶

As a non-spouse beneficiary, you cannot roll the inherited 401(k) into your own IRA. You can request a direct trustee-to-trustee transfer into an inherited IRA titled for your benefit, something like “Jane Smith as beneficiary of John Smith.” That preserves tax-deferred status and often gives you more investment choice than the original plan. There’s no 60-day indirect rollover option for non-spouses; the transfer must go directly between trustees. If the plan cuts you a check, that distribution is final and fully taxable for the year.

A tax planning point worth flagging: waiting until year 10 to drain the account in one lump withdrawal is almost always a mistake with a traditional 401(k). 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 lower total tax bill.

The Life-Expectancy Stretch for Eligible Designated Beneficiaries

If you qualify as an eligible designated beneficiary, you can stretch withdrawals over your own life expectancy instead of following the 10-year rule. RMDs must begin by December 31 of the year after the account owner’s death, and the annual amount is calculated using the IRS Single Life Expectancy Table.¹

For a minor child of the account owner, the stretch lasts only until the child turns 21. At that point, a new 10-year clock starts for the remaining balance.² The rule applies only to the account owner’s own children; grandchildren and other minor relatives don’t qualify as eligible on age grounds.

Disabled and chronically ill beneficiaries keep their eligible status for life, as do beneficiaries who are not more than 10 years younger than the account owner. They can stretch distributions across their full life expectancy without ever hitting the 10-year rule.

Estates, Trusts, and Other Non-Designated Beneficiaries

When no individual is named on the plan, or the beneficiary is an estate, charity, or trust that doesn’t qualify as see-through, the timeline compresses significantly.¹

Death before the required beginning date: the account must be emptied by the end of the fifth year following the year of death.²
Death on or after the required beginning date: distributions are taken over the account owner’s remaining single life expectancy, calculated using the owner’s age in the year of death.

Some trusts can qualify as “see-through” trusts, which lets the IRS treat the trust’s individual beneficiaries as the designated beneficiaries for distribution purposes. Those that fail the tests default to the non-designated beneficiary timelines above.

How Distributions Are Taxed

Whether you owe income tax on withdrawals depends on whether the account held pre-tax or Roth contributions.

Traditional 401(k)

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 lands on whoever takes the distribution.

Roth 401(k)

Distributions from an inherited Roth 401(k) are generally tax-free, including the investment earnings, as long as the original account was established at least five years before the withdrawal.⁷ The distribution timeline (10-year rule, life-expectancy stretch, or 5-year rule) still applies based on your beneficiary category, regardless of whether the account is traditional or Roth.

No 10% Early Withdrawal Penalty

Inherited 401(k) distributions are exempt from the 10% early withdrawal penalty no matter how old you are when you take them.⁸ The exception exists because the distribution was triggered by the account owner’s death. If a surviving spouse rolls the funds into their own personal IRA and later takes a withdrawal before age 59½, the inherited exemption is gone and the 10% penalty applies.

The 20% Withholding Problem

If you take a rollover-eligible distribution but have the check sent directly to you instead of transferring it trustee-to-trustee, the plan administrator must withhold 20% for federal income tax.⁹ You’ll get credit for the withholding when you file your return, but if you meant to roll the full amount into another account, you’d need to come up with that 20% from other funds to complete the rollover. Anything you can’t replace becomes a taxable distribution. Requesting a direct trustee-to-trustee transfer avoids the problem entirely.

Penalties for Missed Required Distributions

Missing an RMD is one of the most expensive mistakes in retirement tax law. If you withdraw less than your required amount for any year, the IRS imposes an excise tax of 25% on the shortfall.¹⁰ The penalty drops to 10% if you correct the shortfall within a two-year window and file the appropriate return reflecting the correction.¹¹

To fix a missed RMD, withdraw the missed amount as soon as you notice, then file IRS Form 5329 for the year the distribution was missed. On the form you can request a penalty waiver by citing 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 supporting documentation. The IRS has discretion to waive the penalty entirely if the mistake was genuinely reasonable and you’ve taken steps to correct it.

This is especially relevant for beneficiaries subject to the annual RMD requirement under the 10-year rule. The transition-period waivers covered 2021 through 2024, but the requirement is fully enforceable starting with the 2025 distribution year.

If You Inherit an Already-Inherited Account

Successor beneficiaries (people who inherit from the original beneficiary rather than the original account owner) don’t get a fresh clock. If the original beneficiary was a standard designated beneficiary, the successor must empty the account by December 31 of the year containing the 10th anniversary of the original account owner’s death. If the original beneficiary was an eligible designated beneficiary, the successor generally gets their own 10-year period starting from the original beneficiary’s death.

Annual RMDs that had already started on an inherited account cannot be stopped. If the original beneficiary died partway through a year without taking that year’s RMD, the successor is responsible for completing it. And a surviving spouse who inherits an already-inherited account does not get the special spousal options; the right to roll the funds into your own IRA applies only when you inherit directly from the original account owner.

Federal Estate Tax

A 401(k) is included in the deceased owner’s taxable estate at its full date-of-death value. For 2026, the federal estate tax exemption is $15,000,000 per individual, so estates below that threshold owe no federal estate tax.¹² For most families the exemption covers the entire estate. Above the threshold, the 401(k) balance can be hit by estate tax on top of the income tax the beneficiary owes on distributions.

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