Inherited 401(k) Options and Rules You Must Follow

When a loved one passes away, there's much to sort out. A 401(k) retirement account might be bequeathed to a spouse, family member, or friend. If you inherit such an account, here are your options and the rules you must follow.

Key Takeways

  • All 401(k) accounts offer tax-deferred retirement savings.
  • If you are married, you automatically inherit your spouse's 401(k) unless the will stipulates otherwise.
  • Spouses have more options than other heirs.

What Is a 401(k)?

A 401(k) is an employer-sponsored retirement plan, typically funded through payroll deductions. Many employers match all or part of what their employees contribute as part of their benefits package.

Traditional 401(k)s are funded using pretax dollars, reducing your taxable income immediately by the amount of your contribution. The taxes won't be due until you withdraw money from the account.

Roth 401(k)s use after-tax money for contributions, so you pay the income taxes due immediately but your money will not be taxed when it is withdrawn.

Roth 401(k)s are less common than traditional 401(k)s. Not all employers offer the option.

Withdrawals can be made without penalty from your 401(k) when you have reached the age of 59½, and you must start taking required minimum distributions (RMDs) at the age of 73. (The age was increased from 72 as of Jan. 1, 2023.)

After you die, any unused funds in your account will pass to those you name as beneficiaries. If you do not name a beneficiary or the account's beneficiary is deceased, the IRA will become part of your estate.

What Happens When You Inherit a 401(K) From Your Spouse?

If you are the beneficiary of a 401(k) account, your options are dependent on your connection to the original owner. If you inherited the account from your spouse, you have more options than non-spousal beneficiaries. If you're a spouse:

  1. You can designate yourself as the owner and place the account in your name. You'll have to take the required minimum distributions (RMDs) based on your life expectancy, but you can also continue contributing to the account.
  2. You can transfer the money into an inherited IRA. Inherited IRAs can take the form of any IRA, including a Roth, traditional, SIMPLE, or SEP IRA.
  3. You can treat yourself as the beneficiary and withdraw the funds, accepting any taxes due at the time. If you're over 59½, you won't have to pay early withdrawal penalties. You will owe income tax on the disbursement.
  4. You can disclaim the account and pass it to an alternate beneficiary.


If your partner dies but you are not legally married, you are not entitled to that person's 401(k). Domestic partnerships require a beneficiary designation for you to inherit the account, even if you've been together for many years.

What Are Your Options as a Non-Spousal Beneficiary?

You may inherit a 401(k) account from someone you're not married to—like a parent, legal guardian, or friend. In this case, the rules are a bit different. You are not allowed to roll the 401(k) over into your own accounts. Instead, you have only two options: disclaim the account or empty the account by the end of the 10th year after the year of the account owner's death.

You must disclaim the account within nine months of the account holder's death.

You must start taking RMDs from the inherited IRA by Dec. 31 of the year following the original owner's death. As a result of the recently adopted SECURE Act, you have 10 years after the original account holder's death to complete the RMDs.

There are exceptions to this rule. If the beneficiary is disabled, chronically ill, the minor child of the account owner, or no more than 10 years younger than the original account holder, the beneficiary may stretch the distributions over the rest of their lives.

If you miss the deadline to begin the RMDs, your disbursement amount will be calculated on the original account holder's life expectancy rather than your own. If that person was older than you, this could mean significantly larger payments.

Though this may not seem like a problem, those payments will increase your tax exposure. If the RMDs are enough to push you into the next tax bracket, you may face a hefty tax bill.

Can I Commingle Inherited 401(k)s With Current Accounts?

If you are the surviving spouse of the original 401(k) holder, you may roll their accounts into your own. You are not allowed to do this if you are not a spouse. Instead, you can take withdrawals from the account over 10 years.

What Are the Penalties for Withdrawing Money Before Age 59½?

If you are the surviving spouse, there are no penalties for withdrawing money, regardless of age. However, you will still have to pay income taxes on the money you withdraw. If you are a non-spouse, you will be charged a 10% early withdrawal penalty fee in addition to income tax if you are younger than 59½.

Do I Have to Take RMDs if the Original Account Holder Was Younger Than 72?

If your spouse was too young to begin taking RMDs when they passed away, you don't have to start taking RMDs until the year that person would have been 73. For example, if Joe died at 63 in 2022, this widow wouldn't have to take the first RMD until 2032.

The Bottom Line

The rules and regulations surrounding inherited 401(k)s can be confusing. An experienced tax consultant or estate planner will be a tremendous asset as you determine your course of action.

For spousal inherited 401(k)s, there are several options to choose from, but non-spousal beneficiaries must make decisions quickly to satisfy the law.

Make sure your beneficiaries know about their coming inheritance so that they can make wise decisions.

Article Sources
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  2. U.S. House of Representatives, U.S. Code. "26 USC 401: Qualified Pension, Profit-Sharing, and Stock Bonus Plans."

  3. Internal Revenue Service. "401(k) Plan Overview."

  4. Internal Revenue Service. "Topic No. 451 Individual Retirement Arrangements (IRAs)."

  5. Internal Revenue Service. "401(k) Resource Guide - Plan Participants - General Distribution Rules."

  6. U.S. Senate Committee on Finance. "SECURE 2.0 Act of 2022," Page 2.

  7. Internal Revenue Service. “Retirement Topics - Beneficiary.”

  8. Internal Revenue Service. "Publication 590-B (2021), Distributions From Individual Retirement Arrangements (IRAs)."

  9. Internal Revenue Service. "Part 25. Special Topics, Chapter 18. 8 Community Property, Section 1. Basic Principles of Community Property Law."

  10. Internal Revenue Service. "Retirement Topics - Beneficiary."

  11. U.S. House of Representatives, U.S. Code. "26 USC 2518: Disclaimers."

  12. Internal Revenue Service. "IRS Reminds Those Over Age 72 to Start Withdrawals From IRAs and Retirement Plans to Avoid Penalties."

  13. U.S. Congress. "H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019."

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