Inherited 401(k) Options and Rules You Must Follow

When a loved one passes away, there's much to sort out. If they had a 401(k), they might bequeath their retirement account 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 otherwise stipulated.
  • Spouses and non-spouses have different options, and spouses have more options.

What Is a 401(k)?

A 401(k) is an employer-sponsored retirement plan, typically funded through payroll deductions. Many employers will match all or part of what their employees contribute as part of their benefits package. Traditional 401(k)s are funded using pretax dollars, lessening your tax burden at the end of the year. Roth 401(k)s use after-tax money for contributions, which impacts your taxes now but will not be taxed when withdrawn. Roth 401(k)s are less common than traditional 401(k)s.

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 72. After you die, any unused funds in your account will pass to those you name as beneficiaries. They automatically pass it to your spouse if you don't name anyone. It will become part of your estate if you have no living family.

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.

  1. You can designate yourself as the owner, changing the account to be 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 any early withdrawal penalties. You will be subject to 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 their 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?

It's also possible to 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 transfer the assets to an inherited IRA and take the RMDs. 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 a few exceptions to this rule. Suppose 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. In that case, they may stretch their 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 they were 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?

That depends. 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 they would have been 72. For example, if Joe died at 63 in 2022, this widow wouldn't have to take the first RMD until 2031.

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 to make wise decisions.

Article Sources
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  1. Office of the Law Revision Counsel. "26 USC 401: Qualified Pension, Profit-Sharing, and Stock Bonus Plans."

  2. Internal Revenue Service. "Roth Comparison Chart."

  3. Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions."

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

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

  6. Office of the Law Revision Counsel. "26 USC 2518: Disclaimers."

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

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