Inherited IRA and 401(k): Rules, Taxes, and the 10-Year Rule

Option 1: Spousal Rollover (Most Common)

Roll the inherited account into your own IRA. The account is then treated as if it has always been yours. RMDs are based on your own age, using the standard IRS life expectancy tables.

Best for: Spouses who do not need the money immediately and want to continue tax-deferred (or tax-free, for Roth) growth. Particularly beneficial for younger spouses, since RMDs do not begin until age 73.

Option 2: Inherited IRA

Keep the account as an "inherited IRA" in the deceased spouse's name. You can take distributions based on your life expectancy, and there is no 10% early withdrawal penalty regardless of your age.

Best for: Spouses under age 59 1/2 who need access to the funds now. A spousal rollover would subject withdrawals to the 10% early withdrawal penalty, but keeping it as an inherited IRA avoids this.

Option 3: Lump Sum Distribution

Withdraw the entire balance at once. For traditional accounts, the entire amount is taxable as ordinary income in the year of withdrawal.

Best for: Very rarely the best option. Taking a large lump sum can push you into a much higher tax bracket. Consult a tax professional before choosing this route.

Joint-and-Survivor Annuity

If the employee chose this option, the surviving spouse continues to receive a percentage of the monthly benefit (typically 50%, 75%, or 100%) for the rest of their life. This is the most common option for married employees.

Single Life Annuity

Payments stop at the employee's death. No survivor benefit is paid. If the employee was married when they chose this option, the spouse must have signed a written consent waiving the survivor benefit.

Period Certain Annuity

Guarantees payments for a set number of years (for example, 10 or 20 years). If the employee dies before the guaranteed period ends, the beneficiary receives the remaining payments.

Pension Benefit Guaranty Corporation (PBGC)

If the employer's pension plan has been terminated and taken over by the PBGC, survivor benefits are still generally protected. Contact the PBGC at 1-800-400-7242 or visit pbgc.gov to check on benefits.

What is the 10-year rule for inherited IRAs?

Under the SECURE Act (effective January 1, 2020), most non-spouse beneficiaries must withdraw all funds from an inherited IRA within 10 years of the original account holder's death. There are no required minimum distributions during the 10-year period (for deaths before the account holder's required beginning date), but the account must be fully emptied by December 31 of the 10th year after death. This replaced the previous "stretch IRA" strategy that allowed distributions over the beneficiary's lifetime.

Do I have to pay taxes on an inherited 401(k)?

It depends on the type of account. Distributions from an inherited traditional 401(k) or traditional IRA are taxed as ordinary income. Distributions from an inherited Roth 401(k) or Roth IRA are generally tax-free, provided the account has been open for at least 5 years. In both cases, the 10% early withdrawal penalty does not apply to inherited retirement accounts, regardless of the beneficiary's age.

Can a spouse roll over an inherited IRA into their own IRA?

Yes. A surviving spouse has a unique option that no other beneficiary has: they can roll the inherited IRA or 401(k) into their own IRA. This is called a "spousal rollover." Once rolled over, the account is treated as if it were always the spouse's own account, with required minimum distributions based on the spouse's own age. This is often the best strategy for younger spouses who do not need the money immediately.

What happens to a retirement account if there is no beneficiary designated?

If no beneficiary is designated on the account, the retirement plan's default rules apply. Typically, the account passes to the estate, which may require full distribution within 5 years (the "5-year rule"). This is the worst outcome from a tax perspective because it accelerates the tax liability and eliminates the option to spread distributions over a longer period. This is why keeping beneficiary designations up to date is critically important.

Are inherited Roth IRAs subject to the 10-year rule?

Yes. The 10-year rule applies to inherited Roth IRAs for non-spouse beneficiaries, just as it does for traditional IRAs. The key difference is that qualified distributions from Roth accounts are tax-free. This means a non-spouse beneficiary must empty the inherited Roth IRA within 10 years, but they will not owe income tax on the distributions (assuming the 5-year rule is met). Beneficiaries may benefit from waiting until year 10 to withdraw, allowing more years of tax-free growth.

What are the exceptions to the 10-year rule?

The SECURE Act identifies five categories of "eligible designated beneficiaries" who are exempt from the 10-year rule and can still stretch distributions over their lifetime: (1) the surviving spouse, (2) minor children of the deceased (but only until they reach the age of majority, then the 10-year clock starts), (3) individuals who are disabled as defined by the IRS, (4) individuals who are chronically ill, and (5) individuals who are not more than 10 years younger than the deceased account holder.

How do I claim a deceased person's 401(k)?

Contact the plan administrator at the deceased person's employer. You will need to provide a certified copy of the death certificate and your identification. The plan administrator will verify you as the designated beneficiary and explain your distribution options. If the account balance is over $5,000, the plan cannot force an immediate distribution. If the deceased had multiple 401(k) accounts from different employers, you will need to contact each plan separately.