Inherited 401(k): The Rules by Beneficiary Type

The short answer

The beneficiary form controls. The account skips probate, goes to whoever is named, and becomes claimable once the plan administrator has the death certificate and its paperwork. The same federal framework that governs an inherited IRA applies here, with one addition that surprises people: the employer’s plan document adds its own layer of rules.

The plan gets a say

Tax law sets the outer limits, and each 401(k) plan writes its own rules inside them. Some plans let a beneficiary keep the account for the full stretch the law allows; others force a faster payout or a lump sum. The plan’s summary plan description says which, and the administrator must provide it. Most non-spouse beneficiaries can also move the money out of a restrictive plan by direct rollover into an inherited IRA, which keeps the tax clock intact while escaping the plan’s payout rules.

Spouses

A surviving spouse can usually roll the account into their own IRA or 401(k), keep it as an inherited account, or take it under the plan’s schedule. The choice has teeth: money rolled into your own account becomes yours, including your own early-withdrawal rules if you are under retirement age, while money kept as inherited stays reachable without the early-withdrawal addition. A spouse who needs the money soon and is under 59½ often keeps it inherited for exactly that reason.

Everyone else: the 10-year rule

Most non-spouse beneficiaries of owners who died after 2019 must empty the account by the end of the tenth year after the death, and where the owner had already started required distributions, annual withdrawals continue inside that window. Eligible designated beneficiaries, including a minor child of the owner and disabled or chronically ill beneficiaries, keep longer schedules. The details moved several times in recent years, which is why our inherited IRA guide carries the beneficiary-type breakdown and the current-year caveats.

Taxes

Traditional 401(k) money is pre-tax, so withdrawals are ordinary income to the beneficiary in the year taken, and there is no basis step-up: retirement accounts are the big exception to the step-up rule that resets other inherited assets. A designated Roth account passes tax-free where the holding rules were met. No path owes the 10% early-withdrawal addition on death benefits. The timing lever is real: spreading withdrawals across the ten years can hold the money in lower brackets, while a lump sum stacks it into one.

Mistakes that cost real money

• Cashing out by default. A lump sum is taxed all at once, and plans sometimes present it as the standard choice.
• An indirect rollover. Non-spouse beneficiaries must move money by DIRECT transfer; a check made out to you personally can end the tax deferral on the spot.
• Missing the plan’s own deadlines. Some plans require elections within months of the death, well before the tax law would.
• Ignoring year-of-death required distributions. If the owner died after their required start date without taking that year’s distribution, the beneficiary generally takes it.

If you are settling the rest of the estate too, a short assessment shows which process the probate assets need.