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When you inherit a 401(k), you have two immediate decisions to make: how you want to receive the funds, and how quickly the IRS requires you to take them. Your options — and your deadlines — depend almost entirely on your relationship to the account owner and whether the owner had already begun taking required minimum distributions (RMDs) before they died.
Under the SECURE Act of 2019, most non-spouse beneficiaries must fully withdraw an inherited 401(k) within 10 years of the owner’s death. Updated IRS regulations finalized in 2024 and effective from January 2025 further clarify that if the original owner had started RMDs, most non-spouse beneficiaries must also take annual distributions during those 10 years — not just empty the account at the end. Surviving spouses have more flexibility, including new options added by SECURE 2.0 in 2024.
This guide covers every option available depending on whether you are a spouse, a child, a non-family beneficiary, or a trust — along with the tax implications and the steps to take right now.
Key Takeaways
- Beneficiaries of an IRA or 401(k) can be a spouse, family member, friend, or trust, each with different inheritance rules and tax implications.
- Inherited 401(k) funds can be taken as a lump sum, rolled into a retirement account, or withdrawn under the 5-year, 10-year, or RMD rules, depending on eligibility.
- Withdrawals are generally taxable as ordinary income, though Roth accounts may offer tax-free distributions if certain conditions are met.
- The ideal withdrawal strategy depends on tax rates, account size, and personal financial needs, making professional guidance essential.
What Do You Mean by Beneficiary of a Retirement Account?
Your 401(k) beneficiary is the person or organization you designate to receive your account’s profits in the event of your passing. You may specify two beneficiary types
- Primary BeneficiaryHe/she is the person you want to inherit your 401(k) assets first when you pass away.
- Contingent BeneficiaryIf your primary beneficiary is unable or unwilling to accept the assets, your contingent beneficiary, or secondary beneficiary, will.
Who Can Be the Beneficiary?
These people/organizations can be appointed as a beneficiary
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Spouse
When compared to other retirement account beneficiaries, a spouse has the most flexibility. You can generally use the inherited 401(k) from your spouse as your account or take annual distributions (RMDs) in accordance with IRS regulations.
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Family Member/Friend/Children
Inheritance of IRA by children or other family members is also common. What you should be aware of and remember is that the money of 401(k) inherited from a parent, close friend, or a family member must be taken out within 10 years.
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Trust
The most complicated scenario is this one. The way of inheritance will depend on the kind and conditions of the trust.
What Transpires if a 401(k) is Inherited?
On a 401(k) beneficiary designation form, the account owner designates their beneficiaries. If the primary beneficiary is no longer alive or does not wish to receive the money, it is given to the contingent or secondary beneficiaries.
You must choose how you want to receive your inherited 401(k) funds as the recipient. The choices are determined by some elements, such as
- The relationship you have with the account owner
- Age of the account owner at death
- When did the account holder pass away
- Your age as compared to the account owner’s age at the time of death
- Your wellbeing
- What is permitted by the 401(k)
How the SECURE Act Changed Inherited 401(k) Rules
Before 2020, beneficiaries who inherited a 401(k) could spread withdrawals over their entire lifetime — a strategy known as the “stretch IRA” or stretch 401(k). A 30-year-old inheritor could potentially defer taxes on the account for 50 or more years, letting the funds compound tax-deferred over their working career and into retirement.
The SECURE Act of 2019 (Setting Every Community Up for Retirement Enhancement Act), effective January 1, 2020, ended the stretch strategy for most non-spouse beneficiaries. It introduced a new framework with three categories of beneficiary — each with different withdrawal rules:
| Beneficiary category | Who qualifies | Withdrawal rule |
|---|---|---|
| Eligible Designated Beneficiary (EDB) | Surviving spouse; minor child of account owner; disabled individual; chronically ill individual; person not more than 10 years younger than owner | Can still use life expectancy (stretch) method OR choose the 10-year rule |
| Designated Beneficiary (non-EDB) | Most adult children, grandchildren, siblings, friends — anyone named on the form who doesn’t qualify as an EDB | Must empty account within 10 years of owner’s death. Annual RMDs required during the 10 years if owner died after their required beginning date (RBD) |
| Non-Designated Beneficiary | Estate, charity, non-qualifying trust (entity without a life expectancy) | 5-year rule if owner died before RBD; remaining life expectancy rule if owner died after RBD |
SECURE 2.0 Update (effective 2024): The SECURE Act 2.0 of December 2022 brought additional changes: (1) The RMD age for original account owners increased from 72 to 73 (and will increase to 75 by 2033). (2) Roth 401(k) account owners are no longer required to take RMDs during their lifetime. (3) Surviving spouses gained a new election option — see Section 6 of this guide. The missed-RMD penalty was also reduced from 50% to 25%, with a further reduction to 10% if corrected within 2 years.
What Is an Eligible Designated Beneficiary (EDB) — and Why It Matters
Whether you qualify as an Eligible Designated Beneficiary (EDB) is the single most important question when inheriting a 401(k) from someone who died in 2020 or later. EDBs have access to the life expectancy method — meaning they can stretch distributions over their lifetime rather than being forced to empty the account within 10 years. This can dramatically reduce their annual tax burden.
There are exactly five categories of EDB under the SECURE Act:
- Surviving spouse — Has the most options of any beneficiary type, including the ability to roll the inherited 401(k) into their own retirement account as if it were always theirs.
- Minor child of the account owner — Can use the life expectancy method until reaching age 21. At age 21, the 10-year rule kicks in and the account must be fully distributed by age 31. Note: this applies only to the account owner’s own child — not grandchildren or other minors.
- Disabled individual — Must meet the IRS definition of disability under IRC Section 72(m)(7). For inherited 401(k) plans (not IRAs), documentation must be submitted to the plan administrator by October 31 of the year following the account owner’s death.
- Chronically ill individual — Must be chronically ill within the meaning of IRC Section 7702B(c)(2) as of the date of the account owner’s death.
- Individual not more than 10 years younger than the account owner — This includes older siblings, friends close in age, and anyone born within 10 years before the account owner. If you are older than the original owner, you also qualify.
Your father passed away in June 2025 at age 72, having already begun taking RMDs. He left his $200,000 401(k) to two beneficiaries: his 68-year-old sister (4 years younger than him) and his 45-year-old daughter.
- Sister (68): She is not more than 10 years younger, so she qualifies as an EDB. She can take distributions based on her life expectancy — potentially spreading them over 20+ years and keeping annual tax bills manageable.
- Daughter (45): She is 27 years younger, so she is a non-EDB. She must empty the account by December 31, 2035. Because her father had begun RMDs, she must also take annual RMDs in 2026–2034 on top of the 10-year deadline.
What are the Different Ways to Inherit a 401K?
The following options are available to you when taking money out of your inherited 401(k)
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Take the Lump Sum
You can take a lump-sum distribution if you want to take out your whole inherited 401(k) at once. This is straightforward and provides you with a sizable infusion of cash, but you have to pay taxes on it all at once. This is not the best strategy if you want to save taxes. The other alternatives in this list allow you to do so.
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Transfer the Funds to Your Retirement Account
If you are sure you wouldn’t need the money sooner, you can transfer the funds to your personal retirement account. This is typically the spouse’s preferred method since it allows them to postpone paying taxes on inherited 401(k) earnings until they withdraw the funds on retirement.
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Follow the 5 or 10 year Rule
You can use the five and 10 year regulations. They allow you to withdraw funds whenever you need to, provided that the entire inherited 401(k) is depleted before the end of the fifth or tenth year following the account owner’s passing, respectively. If the account owner passed away in 2020 or earlier, the five-year rule would apply, and if they passed away in 2021 or after, the ten-year rule would apply.
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Take the RMD
You also have the choice of spreading the withdrawals out over your lifetime by taking annual required minimum distributions (RMD). However, this facility is limited to certain eligible beneficiaries if the account owner died in 2021 or later. In special scenarios, you can take more than your RMD.
How Are Withdrawals From an Inherited 401(k) Taxed?
The payouts from an inherited 401(k) are typically counted as ordinary taxable income for the beneficiary. This would be the case if your parent contributed to a 401(k) before taxes, which is what most people do. Large withdrawals may result in you moving into a higher tax rate, being subject to the 3.8% Medicare surtax, or losing other income-based tax deductions.
However, if your parent first started contributing to their “designated Roth account” at least five years before you start your withdrawals, dividends from a Roth 401(k) you inherit could be tax-free.
What is the Ideal Time to Withdraw Money From an Inherited 401(K)?
There is no one answer or thumb rule for that. When you should withdraw the funds from your inherited 401(k) depends on many factors, such as current tax rate, account size, your medical needs & financial situation, and any life changes you expect in the upcoming 10 years.
Here are some model strategies which you can apply to save tax. However, you should first discuss them with your financial advisor
- If your tax rate is about to increase, you can either take out a lump sum and reinvest the after-tax funds in a brokerage account or convert the inherited 401(k) to Roth IRA.
- Are you sure your tax rates will stay flat? In that case, you must let a small account grow and take out the RMD over 10 years from a bigger account.
- If the tax rates are expected to go down, the obvious thing is to wait for them to go down before making any withdrawals.
How Does Inheriting an IRA or 401(K) Work for Different Beneficiaries?
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Inheriting an IRA as a Spouse
You have many alternatives if you are inheriting an IRA from your spouse. You can transfer it to your IRA, take RMDs, or you can open your inherited IRA. You also have the option to withdraw the lump sum amount or convert the IRA to Roth.
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Inheriting an IRA as a Family Member
You must take all the money from a retirement account you inherited from someone other than a spouse who passed away after December 31, 2019, before the end of the tenth year after the year of death. Exceptions can be made to this rule depending on your age and health condition.
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Inheriting an IRA as a Trust
The IRS regulations (depending on the type of trust) and the provisions of the trust (based on the intentions of the account owner) will both apply to distributions. Each situation’s outcome will be different. Therefore it’s crucial to talk with the trustee and your financial and legal advisors.
Need Any Help?
FAQs
What is the tax rate on an inherited IRA? Can I avoid tax on an inherited IRA?
You are not subject to taxes if you inherit a Roth IRA. However, any withdrawal from a traditional IRA is subject to ordinary income taxes.
What are the rules for distributions from an inherited IRA?
There are different rules for different kinds of withdrawals. It depends on whether you are taking a 10 year, a 5 year route, or a lump sum. Each scenario implies different rules.
Does an inherited IRA have to be distributed in 10 years?
Yes. By the end of the tenth year after the IRA owner's passing, the designated beneficiary must liquidate the account.
What happens if I cash out an inherited IRA?
A lump sum distribution is typically not thought of as the best approach to disperse money from an inherited IRA. This is because you will generally be subject to federal or possibly state income tax on a lump sum withdrawal for the tax year in which it is taken.
