Inheriting a Retirement Account: 401k and IRA Rules

Retirement Accounts Don't Go Through Probate

One of the most important things to understand about inherited retirement accounts (IRAs, 401(k)s, 403(b)s, and similar accounts) is that they pass by beneficiary designation — entirely outside of probate. The beneficiary named on the account inherits directly, regardless of what the will says. This is why keeping beneficiary designations up to date is so critical in estate planning.

When you inherit a retirement account, the rules governing what you can do with it — and when you must take money out — depend heavily on your relationship to the deceased.

Spouse Beneficiaries: Maximum Flexibility

A surviving spouse has the most options of any beneficiary. A spouse can:

Roll the account into their own IRA: This is the most common and typically most tax-advantageous option. The spouse treats the account as their own, delaying required minimum distributions (RMDs) until they reach age 73 (the current RMD age), using their own life expectancy for calculations.

Treat it as an inherited IRA: This option can be advantageous if the surviving spouse is under 59½ and needs to access the funds before then (inherited IRAs are not subject to the 10% early withdrawal penalty, but the spouse's own rollover IRA would be).

Leave it in the deceased spouse's plan: 401(k) plans may have slightly different options; some allow the spouse to remain in the plan as a beneficiary.

Non-Spouse Beneficiaries: The 10-Year Rule (SECURE Act)

The SECURE Act of 2019 dramatically changed the rules for non-spouse beneficiaries of retirement accounts. Prior to the SECURE Act, non-spouses could "stretch" distributions over their own life expectancy — a strategy called the "stretch IRA." That strategy is now largely eliminated.

Under current law, most non-spouse beneficiaries must withdraw the entire inherited account within 10 years of the original account holder's death. There are no annual required minimum distributions within that 10-year window (with some exceptions for accounts where the original owner had already begun RMDs) — the rule simply requires that the account be fully withdrawn by December 31 of the 10th year.

Exceptions — "eligible designated beneficiaries" who can still use a life-expectancy stretch include: surviving spouses, disabled or chronically ill individuals, minor children of the deceased (until they reach majority, then the 10-year rule kicks in), and beneficiaries not more than 10 years younger than the deceased.

Traditional vs. Roth: Tax Treatment

Traditional IRA / 401(k): Distributions are taxed as ordinary income in the year received. The deceased never paid income tax on these funds; you will. Timing distributions carefully within the 10-year window can minimize your total tax bill — spreading distributions across years where your income is lower is generally better than taking it all at once.

Roth IRA: Distributions are generally income-tax-free to the beneficiary, since the original account holder paid taxes before contributing. You still must empty the account within 10 years (for most non-spouse beneficiaries), but the withdrawals are not taxable.

What If There Is No Named Beneficiary?

If the account has no living named beneficiary, it typically passes to the estate and goes through probate. This is the worst outcome from a tax perspective: the account loses the ability to be "stretched" at all, and the full balance may need to be distributed within 5 years (for accounts where the original owner was under age 73) or over the remaining life expectancy (for accounts where RMDs had already begun).

This is why naming — and updating — beneficiary designations is so important.

Steps to Claim an Inherited Retirement Account

1. Contact the plan administrator (the brokerage, 401(k) plan, or bank holding the account) 2. Notify them of the account holder's death and provide your information as beneficiary 3. Submit a certified death certificate and a completed beneficiary claim form 4. Choose your distribution option (roll to your own IRA if you're a spouse; establish an inherited IRA if you're a non-spouse) 5. Work with a tax professional to plan the timing of distributions

The most common and costly mistake: cashing out the entire account immediately. A large lump-sum withdrawal pushes you into a high tax bracket and generates a tax bill you could have spread over years. Take time to understand your options before taking action.