What happens to your taxes when you inherit a 401(k)

When you inherit a 401(k), the money is subject to income tax when you withdraw it — but the amount you owe and when you owe it depends on your relationship to the person who died, the type of 401(k), and the rules that applied to their account. The account itself does not disappear or transfer tax-free. Instead, you become responsible for taking distributions and paying tax on them at your ordinary income tax rate.

The IRS treats different heirs differently. A surviving spouse has options that other heirs do not have. Adult children, grandchildren, and non-family beneficiaries face stricter timelines and fewer ways to reduce the tax hit. Understanding which category you fall into is the first step to managing what you owe.

Key Takeaways

  • Surviving spouses can roll a 401(k) into their own IRA and delay withdrawals until age 73, which can spread taxes over many years.
  • Non-spouse heirs must take distributions within 10 years of the account holder's death under current rules, and each withdrawal is taxed as ordinary income.
  • The original account holder's required minimum distribution for the year they died must still be taken, and you are responsible for it.
  • Roth 401(k)s have the same withdrawal important date as traditional 401(k)s, but the distributions themselves are tax-free if the account was open at least five years.
  • Splitting an inherited 401(k) into separate accounts for each beneficiary can help you manage withdrawals and taxes independently.

Surviving spouses: the spousal rollover option

If you are the surviving spouse, you have a choice that no other heir has: you can roll the 401(k) into an IRA in your own name. This treats the money as if it were always yours, and you can delay withdrawals until you reach age 73. This is often the best way to minimize taxes because it spreads distributions over the longest possible time.

When you do take withdrawals, you pay tax only on the amount you withdraw that year. If you do not need the money when ready, you can leave it invested and let it grow tax-deferred. You also have the option to name your own beneficiaries, which gives you control over what happens to the remaining balance after you die.

Another option available only to spouses is to treat the 401(k) as your own without rolling it over. This means you stay on the original account and take distributions as the account holder would have. This is less common because it does not give you the same flexibility, but it may make sense if the account has a low balance or you need the money right away.

Non-spouse heirs: the 10-year distribution window

If you are an adult child, grandchild, or other non-spouse beneficiary, you must withdraw all the money from the inherited 401(k) by December 31 of the tenth year after the account holder died. You cannot stretch the withdrawals over your lifetime as was possible under older rules. This compressed timeline means you will owe taxes on a larger portion of the money sooner.

You do have some control over when you take the money within that 10-year window. You could take small amounts each year to spread the tax burden, or you could wait until year 10 and take it all at once. The strategy that works best depends on your income in other years and what tax bracket you fall into. Taking smaller amounts over time often results in a lower total tax bill because you stay in a lower bracket longer.

The account holder's required minimum distribution for the year they died is not subject to the 10-year rule — you must take that amount in the year of death, regardless of when you plan to take the rest. If the account holder had already taken their RMD for that year, you do not owe another one.

Roth 401(k)s and tax-free growth

If the inherited account is a Roth 401(k) rather than a traditional 401(k), the distributions themselves are tax-free — but only if the account was open for at least five years before the account holder died. The five-year clock starts on January 1 of the year the first contribution was made, not the year you inherit it.

The withdrawal important date are the same as for a traditional 401(k): spouses can roll it into a Roth IRA and delay withdrawals, while non-spouse heirs have 10 years to empty the account. The advantage of a Roth is that you avoid the income tax on the distributions themselves, which can be a significant savings if the account is large.

If the Roth 401(k) has not been open for five years, you will owe tax on the earnings portion of each distribution, though the contributions themselves come out tax-free. This is rare but can happen if the account holder opened the Roth late in life or recently switched employers.

Splitting the account to manage taxes separately

If there are multiple beneficiaries on the 401(k), you can ask the plan administrator to split the account into separate inherited accounts — one for each beneficiary. This is not required, but it gives each person control over their own withdrawal schedule and can help you manage taxes more efficiently.

For example, if one beneficiary is retired and in a low tax bracket, they could take larger distributions early. Another beneficiary who is still working and in a high bracket could take smaller amounts and spread them over the full 10 years. Without splitting, the plan administrator might require all beneficiaries to follow the same withdrawal schedule, which may not be optimal for everyone.

Ask the plan administrator whether they allow separate accounting for multiple beneficiaries. Some plans do this automatically; others require a written request. The important date to split is usually the end of the year after the account holder died, so do this early to avoid missing the window.

The year-of-death required minimum distribution

The person who died may have owed a required minimum distribution for the year they passed away. If they had not yet taken it, you are responsible for taking that amount from the 401(k) and paying tax on it. This is true even if you are a non-spouse beneficiary and even if you plan to leave the rest of the money in the account.

If the account holder had already taken their RMD for that year before they died, you do not owe another one. Check with the plan administrator or the final tax return to see whether the RMD was taken. If it was not, calculate what it would have been using the IRS tables and the account balance on December 31 of the prior year, then withdraw that amount before the end of the year of death.

Missing this important date can result in a penalty of 25 percent of the amount that should have been withdrawn, though the IRS may waive the penalty if you have a reasonable cause. It is better to take the distribution and pay the income tax than to face the penalty.

Inherited IRAs and conduit versus accumulation

If the inherited account is an IRA rather than a 401(k), the rules are slightly different. Non-spouse heirs can set up an inherited IRA and take distributions over 10 years, similar to a 401(k). However, some older inherited IRAs may have been set up under the "conduit" method, which allows you to take only the required minimum distribution each year rather than the full balance within 10 years. Check the account documents to see which method applies.

Spouses who inherit an IRA can roll it into their own IRA, just as with a 401(k). This gives them the same flexibility to delay withdrawals until age 73. The tax treatment is the same: traditional IRA distributions are taxed as ordinary income, while Roth IRA distributions are tax-free if the account was open at least five years.

Frequently Asked Questions

Can I avoid taxes on an inherited 401(k) by not withdrawing the money?

No. You must withdraw the money within the required timeframe — 10 years for non-spouse heirs, or by age 73 for surviving spouses who do not roll it over. The tax is owed when you withdraw, not when you inherit. If you do not withdraw by the important date, the IRS will penalize you.

What if I inherit a 401(k) from someone who was not yet taking required minimum distributions?

You still must follow the 10-year rule (or spousal rollover rules if you are the spouse). The account holder's age at death does not change your withdrawal important date. However, if they had reached age 73 and had not yet taken their RMD for the year they died, you must take that RMD before the end of that year.

Do I have to take equal amounts each year from an inherited 401(k)?

No. As a non-spouse beneficiary, you can withdraw any amount you want each year, as long as the entire balance is gone by the end of year 10. You could take nothing for nine years and withdraw everything in year 10, or take small amounts early and larger amounts later. The plan administrator may have their own rules, so check with them about what withdrawal schedules they allow.

What if the inherited 401(k) has lost value since the account holder died?

You still owe income tax on the full amount you withdraw, regardless of whether the account has grown or shrunk. The tax is based on the withdrawal amount, not the original balance. If the account has lost value, you may be able to claim a capital loss on your tax return, but consult a tax professional about whether that applies to your situation.

Can I transfer an inherited 401(k) to my own 401(k) at work?

Only if you are the surviving spouse. Non-spouse heirs cannot roll an inherited 401(k) into their own workplace 401(k). You must keep it in an inherited IRA or leave it in the original 401(k) plan. Spouses can roll it into their own IRA or, in some cases, into their workplace 401(k) if the plan allows it.