What to Know if You’ve Inherited a 401(k)

August 4, 2025

Inheriting a 401(k) can offer financial opportunity—but also brings complex decisions. What you can do with an inherited retirement account depends on a few factors.

These include your relationship to the deceased. It also matters if the account owner had started taking required minimum distributions (RMDs). Lastly, the specific rules of the employer-sponsored plan are important too.

Knowing your choices is important. Each option has tax effects and timing needs that can impact your long-term finances. Whether you’re a surviving spouse or a non-spouse beneficiary, the options and requirements differ significantly.

For Spouse Beneficiaries

As a surviving spouse, you generally have the broadest range of options when inheriting a 401(k). Here are the most common strategies available:

1. Take a Lump-Sum Distribution

You can choose to withdraw the entire balance at once. This option is penalty-free regardless of your age, but the full amount is treated as taxable income (unless it’s a qualified Roth 401(k)). If the account is sizable, the tax hit could be significant and may bump you into a higher income bracket.

2. Roll the Assets into Your Own Retirement Account

You can move the inherited funds into your own IRA or 401(k). If you’re under age 59½ and later withdraw from the account, early withdrawal penalties may apply—unless the withdrawal is from a qualified Roth account. This option allows the assets to continue growing tax-deferred and delays RMDs until you reach age 73.

Another consideration: if the original owner had already started RMDs, you may need to continue them depending on the strategy you choose.

3. Treat the Account as an Inherited IRA

If you prefer not to combine the account with your own retirement funds, you can transfer the assets into an inherited IRA. With this option, you can start taking distributions immediately without early withdrawal penalties. You can also delay distributions until the year your spouse would have turned 73 if they passed away before beginning RMDs.

Thanks to SECURE Act 2.0, a spouse can choose to be treated as the deceased for RMD purposes. They can use the Uniform Lifetime Table to calculate RMDs. This may allow for lower annual withdrawals than the Single Life Expectancy Table used by most non-spouse beneficiaries.

For Non-Spouse Beneficiaries

Non-spouse beneficiaries face stricter limitations and fewer options, but some flexibility remains depending on the situation.

1. Lump-Sum Distribution

Similar to spouse beneficiaries, you can take a full distribution at once. The funds are taxable but not subject to the 10% early withdrawal penalty. Once this step is taken, though, you can’t roll the assets into another retirement account—so the tax implications need to be carefully weighed.

2. Transfer to an Inherited IRA

Instead of taking a lump sum, you can move the funds directly into an inherited IRA through a trustee-to-trustee transfer. This keeps the assets invested and allows you to take distributions over time, without early withdrawal penalties.

Under the SECURE Act, most non-spouse beneficiaries must empty the inherited account within 10 years of the original owner's death. If the owner had already begun taking RMDs, you must continue those annual withdrawals during the first nine years, with the remainder distributed by year 10.

Exceptions to the 10-Year Rule

Certain non-spouse beneficiaries—such as minor children, disabled individuals, chronically ill individuals, and those less than 10 years younger than the deceased—may be allowed to take distributions based on life expectancy instead of following the 10-year rule. However, these

exceptions come with their own timelines and considerations. For instance, once a minor child reaches the age of majority, they must then begin depleting the account within 10 years.

Note: Assets in inherited IRAs are not federally protected from creditors. Depending on your state’s laws, you may want to consult an attorney if you’re concerned about asset protection.

Roth 401(k) Considerations

The SECURE 2.0 Act removed RMD requirements for Roth 401(k) account owners starting in 2024, but inherited Roth 401(k)s are still subject to beneficiary distribution rules. Whether you’re a spouse or non-spouse, you’ll need to follow either the 10-year rule or take RMDs based on age/life expectancy if you qualify for an exception.

While distributions from a Roth 401(k) are generally tax-free if the account met the 5-year holding rule, failure to follow distribution timing rules could still result in penalties.

Other Important Options

Leave the Money in the Employer Plan

Some 401(k) plans allow beneficiaries to keep the funds within the plan for a time, especially for spouse beneficiaries. However, not all plans offer this, and each plan has its own rules for distribution timing. Check with the plan administrator to see what’s allowed.

Disclaim the Inheritance

If you choose not to inherit the 401(k) assets, you can formally disclaim all or part of your share. This moves the assets to the next designated beneficiary in line. In some cases, this strategy can help reduce estate taxes or redirect wealth to a younger generation.

Final Thoughts

Inheriting a 401(k) comes with significant financial implications and several paths forward. The right decision depends on your age, relationship to the deceased, personal financial goals, and the type of 401(k) involved (traditional or Roth). Before making any moves, it’s wise to consult a financial or tax advisor to help you choose the most tax-efficient and strategic option for your situation.

Sources:

https://www.fidelity.com/learning-center/smart-money/inherited-401k-rules

Disclosure:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.