Inherited 401(k): Rollover Rules, Distribution Options, and Tax Planning

What to do when you inherit a 401(k) — and the one mistake that triggers an immediate, unavoidable tax bill.

Does the SECURE Act 10-year rule apply to inherited 401(k)s?

Yes. The SECURE Act of 2019 applies the 10-year depletion rule to all qualified employer plans — 401(k)s, 403(b)s, and 457(b)s — not just IRAs.¹ If you inherited a 401(k) from someone who died after December 31, 2019, and you are not an Eligible Designated Beneficiary, you must fully deplete the account by December 31 of the 10th year after the participant's death.

The same five Eligible Designated Beneficiary categories that exempt certain inheritors from the 10-year rule for IRAs apply equally to inherited 401(k)s: surviving spouses, minor children of the participant, disabled individuals, chronically ill individuals, and beneficiaries not more than 10 years younger than the decedent.¹

Non-spouse beneficiary: your three options

Option 1: Keep funds in the employer's plan

You may be able to leave the inherited 401(k) in the original employer's plan and take distributions directly from the plan administrator. This is the path of least initial effort — but it comes with important constraints:

• Plan-specific rules may be more restrictive than the SECURE Act. Some plan documents require non-spouse beneficiaries to take a lump-sum distribution, others mandate full depletion within five years. A plan that predates SECURE Act amendments may not have been updated to allow the full 10-year schedule. Always request a copy of the plan's Summary Plan Description (SPD) and its beneficiary distribution rules before deciding.
• Investment options are limited to whatever the plan's menu offers — typically a smaller selection than an IRA at a custodian of your choice.
• No rollover out of an inherited account. Once funds are distributed from the plan, you cannot roll them into an inherited IRA. The decision to keep vs. roll must be made before the first distribution.

Option 2: Direct rollover to an inherited IRA (recommended for most)

Under IRC § 402(c)(11), non-spouse beneficiaries may transfer an inherited 401(k) directly to an inherited IRA at a custodian of their choice.² This is the most flexible path for the majority of beneficiaries.

Why a rollover to an inherited IRA is usually better:

• Full IRA investment universe — stocks, ETFs, bonds, mutual funds — versus the plan's limited menu
• Standard IRS rules govern distributions — no need to navigate the plan document's beneficiary-specific terms
• Easier to implement the 10-year withdrawal plan with your own advisor
• If you have other inherited IRA assets, consolidation may simplify planning and RMD tracking

How to do it correctly:

1. Open an inherited IRA at your chosen custodian. The account must be titled to reflect your beneficiary status — for example: "[Participant Name], deceased, IRA for benefit of [Your Name], beneficiary". Do not title it in your own name alone.
2. Contact the 401(k) plan administrator and request a direct trustee-to-trustee transfer to the inherited IRA. Provide the custodian's transfer instructions. Never request a distribution check payable to yourself.
3. The transfer is not a taxable event. No 1099-R is issued for the transferred amount (or it will be coded as a non-taxable rollover).

Option 3: Lump-sum distribution

You may take the entire balance as a single taxable distribution. This is rarely the right choice: the full amount is added to your ordinary income in one year, potentially pushing you into the 35–37% federal bracket. It is occasionally unavoidable if the plan requires it, or worth considering for employer stock (see NUA section below).

Annual RMDs during the 10-year window: the 401(k) wrinkle

For inherited IRAs, the IRS final regulations (T.D. 10001, July 2024) established that non-EDB beneficiaries must take annual RMDs in years 1 through 9 if the original owner died after their Required Beginning Date (RBD).³ The same rule applies to inherited 401(k)s rolled to an inherited IRA, or to distributions taken directly from the plan — with one important wrinkle.

The still-working exception can push the 401(k) RBD later than you'd expect. For IRAs, the Required Beginning Date is always April 1 of the year after the owner turns 73 (or 75 for those born in 1960 or later, per SECURE 2.0).⁴ For 401(k)s, if the participant was still actively employed — and was not a 5% or greater owner of the company — they could delay their RBD until April 1 of the year after they actually retire, regardless of age.⁵

Practical consequence: a 76-year-old who died while still working at a company where they owned less than 5% of the business may have had no RBD yet — their 401(k) RMDs hadn't started. Under T.D. 10001, if the decedent died before their RBD, no annual RMDs are required during the 10-year window. The 10-year depletion rule still applies — you just have flexibility on when within those 10 years you take distributions.

Compare that to an IRA: a 76-year-old IRA owner would always be past their RBD, making annual RMDs in years 1–9 mandatory.

Penalty for missed annual RMDs: 25% excise tax on the amount not distributed, reduced to 10% if corrected within approximately two years. The IRS waived these penalties for 2021–2024 while the regulations were being finalized; starting with the 2026 distribution year, enforcement is active.³

Surviving spouse: significantly better options

A surviving spouse who inherits a 401(k) has three choices — and the most powerful is unavailable to any other beneficiary:

The most common choice — rolling to your own IRA — eliminates the 10-year rule entirely. The 401(k) becomes your own IRA: you use your own life expectancy for RMDs, you can continue making contributions if you have earned income, and your own heirs inherit it subject to the standard SECURE Act rules at your death.

The key exception: if you are under 59½ and may need access to the funds before reaching that age, keeping the account as an inherited IRA preserves penalty-free access. Distributions from an inherited IRA are exempt from the 10% early-withdrawal penalty under IRC § 72(t)(2)(A)(ii), regardless of your age. Distributions from your own IRA before 59½ trigger the 10% penalty unless another exception applies. See the Spousal Rollover vs. Inherited IRA guide for the full decision framework.

Inherited Roth 401(k): different rules apply

If you inherited a Roth 401(k), the 10-year rule still applies — but annual RMDs during the 10-year window are generally not required. SECURE 2.0 eliminated lifetime RMD requirements for Roth designated accounts (Roth 401(k), Roth 403(b), Roth TSP) effective January 1, 2024.⁴ Because Roth 401(k) owners who died in 2024 or later had no RBD, the T.D. 10001 annual RMD rule cannot be triggered — you may defer distributions until year 10.

Distributions from an inherited Roth 401(k) rolled to an inherited Roth IRA are tax-free once the original owner's 5-year rule is satisfied. See the Inherited Roth IRA guide for the full 5-year rule analysis.

Employer stock and NUA: when a rollover may not be optimal

If the inherited 401(k) holds employer stock with significant appreciation, the Net Unrealized Appreciation (NUA) strategy may be worth analyzing before rolling to an inherited IRA — because rolling the stock to an IRA permanently forfeits the NUA option.

Under the NUA strategy, you take a lump-sum distribution of the employer stock in a single tax year. You pay ordinary income tax on the original cost basis of the shares only. The appreciation (NUA) is then taxed at long-term capital gains rates when you eventually sell the shares — not as ordinary income. For appreciated employer stock, this can produce a significant tax saving over an IRA rollover that would convert all future growth into ordinary income.

The conditions are narrow: the distribution must be a qualifying lump sum (entire vested balance distributed in a single tax year), triggered by a qualifying event (which includes the death of the original participant). The inherited character of the account does not disqualify the NUA treatment — heirs can use NUA on inherited 401(k)s.⁶

NUA analysis requires modeling the cost basis, current appreciation, your marginal tax rate, and your expected holding period for the stock. It is rarely the right answer for accounts that don't hold highly appreciated employer stock — and rolling to an inherited IRA is almost always preferable for diversified account holdings.

Step-by-step: what to do when you inherit a 401(k)

1. Notify the plan administrator promptly. Most plans have deadlines for beneficiary claims, and some require action within 60–90 days of the participant's death. Request the Summary Plan Description and the plan's non-spouse beneficiary distribution procedures.
2. Determine whether the decedent was past their Required Beginning Date. For IRAs and retired 401(k) participants, check if they had already started required distributions. For active employees, confirm if the still-working exception applied.
3. Decide: keep in plan vs. roll to inherited IRA. The plan's own rules may narrow your options. If rolling, check whether the plan has employer stock with meaningful NUA before transferring.
4. Open an inherited IRA before initiating the transfer. Contact your chosen custodian (Fidelity, Schwab, Vanguard, or similar) and open an inherited IRA titled in the decedent's name for your benefit. Do not open a new regular IRA.
5. Request a direct transfer — never a check. Contact the 401(k) plan and request a direct trustee-to-trustee transfer to the inherited IRA's transfer instructions. Confirm in writing. If a check is mistakenly sent to you personally, contact a tax advisor immediately — you may not be able to undo the distribution.
6. Calculate your 2026 annual RMD (if required). If the decedent was past their RBD, you likely owe an annual RMD for 2026. Use the Single Life Expectancy Table based on your age in the year after the participant's death, reducing the divisor by 1 each subsequent year.
7. Build a 10-year withdrawal plan. Model your tax bracket trajectory across the 10-year window, coordinate with your own IRA/Roth conversions, and identify low-income years where accelerated distributions can reduce overall tax. Use the 10-Year Withdrawal Optimizer as a starting point.

Sources

1. IRC § 401(a)(9)(H) — SECURE Act 10-year rule for inherited qualified plans; § 401(a)(9)(E)(ii) — Eligible Designated Beneficiary categories. The 10-year rule applies equally to inherited IRAs and inherited qualified plans (401(k), 403(b), 457(b)). Enacted as part of P.L. 116-94 (SECURE Act of 2019), effective for participants dying after December 31, 2019.
2. IRS — Rollovers of Retirement Plan and IRA Distributions. IRC § 402(c)(11): non-spouse beneficiaries may transfer inherited employer plan assets to an inherited IRA via a direct trustee-to-trustee transfer. The 60-day rollover rule is not available for non-spouse beneficiaries — the transfer must be direct.
3. T.D. 10001 — Final Regulations on Required Minimum Distributions (July 2024). Annual RMD requirement in years 1–9 applies to non-EDB beneficiaries when the decedent died after their Required Beginning Date. Applies to both IRAs and qualified plans. IRS delayed enforcement applicability to the 2026 distribution year; 25% excise tax (10% if corrected within two years) applies beginning with 2026.
4. IRS — Retirement Plan and IRA Required Minimum Distributions FAQs. SECURE 2.0 § 107: RMD age is 73 for individuals born 1951–1959 and 75 for those born 1960 or later. SECURE 2.0 § 325: eliminated lifetime RMD requirements for Roth designated accounts (Roth 401(k), Roth 403(b), Roth TSP) effective January 1, 2024.
5. Ed Slott — The Still-Working Exception and RMDs. For 401(k) participants who are not 5% or greater owners, the Required Beginning Date may be deferred until April 1 of the year after the year of retirement, regardless of age. The exception applies only to the plan where the participant is currently employed.
6. Kiplinger — Heirs Can Use NUA Tax Break for Inherited 401(k)s. Non-spouse beneficiaries who inherit a 401(k) containing employer stock may use the Net Unrealized Appreciation strategy, taking a qualifying lump-sum distribution and paying ordinary income tax only on the cost basis while deferring the NUA to capital gains treatment.

Rules verified as of April 2026. Inherited 401(k) planning involves interaction between plan documents, SECURE Act rules, T.D. 10001 regulations, and your individual tax situation. Confirm your specific annual RMD obligations and rollover mechanics with a qualified tax advisor before taking distributions.