Understanding your options for inherited retirement accounts helps you make smart financial choices.
Quick Summary / Key Takeaways
- Most non-spouse beneficiaries who inherit a 401(k) or IRA are required to fully distribute the account within 10 years of the original owner’s death, which can significantly affect taxes if not planned carefully.
- Spouses who inherit a retirement account generally have more flexibility, including the option to roll the account into their own IRA and delay required distributions based on their age.
- The type of account you inherit matters. Traditional accounts are typically taxable when distributed, while inherited Roth IRAs may allow for tax-free withdrawals if rules are met.
- Timing and strategy are important. How and when you take distributions can influence your income, tax bracket, and long-term financial stability.
- Taking the time to understand your beneficiary status and options early can help you avoid penalties and make decisions that align with your broader financial plan.
Introduction
Inheriting a 401(k) or IRA often comes during an emotional time, and it can also introduce unfamiliar financial decisions. Along with the responsibility of managing these accounts comes a set of rules that can directly affect your taxes, cash flow, and long-term financial stability. Understanding how inherited retirement accounts work is an important first step in making thoughtful, informed choices.
This guide is designed to help you navigate what it means to inherit a 401(k) or IRA in 2026. We walk through how these accounts differ, how the rules apply based on your beneficiary status, and how recent changes under the SECURE Act affect distribution timelines. Whether you are inheriting from a spouse, parent, or another loved one, the decisions you make early on can shape the financial impact for years to come.
At Liberty One Wealth Advisors, we believe clarity matters, especially when the rules feel overwhelming. Our goal is to help you understand your options, avoid common pitfalls, and make decisions that align with your broader financial picture. With the right information and a measured approach, you can manage an inherited retirement account in a way that supports both your immediate needs and your long-term goals.
Key Differences for Inherited Retirement Accounts (Non-Spouse)
| Account Type | Distribution Rule | Taxation | Planning Consideration |
|---|---|---|---|
| Traditional IRA or 401(k) | 10-Year Rule | Taxable as ordinary income | Spreading withdrawals may help manage tax impact |
| Roth IRA or Roth 401(k) | 10-Year Rule | Tax-free if qualified | Preserving tax-free growth as long as possible may be beneficial |
| Eligible Designated Beneficiary | Life expectancy rule (with limits) | Taxable for Traditional accounts | Applies only to specific beneficiaries under SECURE Act rules |
| Non-Designated Beneficiary | 5-year rule (limited cases) | Taxable for Traditional accounts | Often applies to estates or charities and requires faster distributions |
Spousal vs. Non-Spousal Inherited Account Options
| Beneficiary Type | Primary Options | Tax Implications | Flexibility |
|---|---|---|---|
| Spouse | Roll inherited account into own IRA or 401(k) | Tax-deferred growth continues | Highest flexibility, can delay RMDs |
| Spouse | Keep as inherited account | Tax-deferred growth continues | Useful in limited situations before RMD age |
| Non-Spouse | Transfer to inherited IRA | Taxable on Traditional distributions | Must follow 10-year rule |
| Non-Spouse | Distribute over time within 10 years | Taxable on Traditional distributions | Allows control over timing within rule limits |
What to Do First After Inheriting a Retirement Account
- Understand how distributions from the inherited account will be taxed, especially if the 10-year rule applies.
- Identify your beneficiary status, including whether you are a surviving spouse, non-spouse beneficiary, or an eligible designated beneficiary, since this determines which distribution rules apply.
- Gather essential documents, including the most recent account statements and the death certificate required by the custodian.
- Contact the plan administrator or IRA custodian to confirm deadlines, distribution options, and required paperwork under current SECURE Act rules.
Planning Distributions and Avoiding Common Mistakes
- Understand how distributions from the inherited account will be taxed, especially if the 10-year rule applies.
- Work with a financial advisor to plan withdrawals over time rather than reacting year by year, which can help manage income taxes.
- If you are a non-spouse beneficiary, ensure the inherited IRA is titled correctly before taking any distributions to avoid penalties.
- Review how the inherited 401(k) or IRA fits into your overall financial picture, including cash flow, taxes, and long-term goals.
Table of Contents
Section 1: UNDERSTANDING INHERITED 401(k) AND IRA ACCOUNTS
- What is the difference between inheriting a 401(k) and an IRA?
- How did the SECURE Act change rules for inherited retirement accounts?
Section 2: OPTIONS FOR SPOUSAL BENEFICIARIES
- What options are available if I inherit my spouse’s 401(k) or IRA?
- Can a surviving spouse roll an inherited 401(k) into their own IRA?
Section 3: RULES FOR NON-SPOUSE BENEFICIARIES
- What is the 10-year rule for non-spouse beneficiaries of inherited retirement accounts?
- How does the 10-year rule apply to an inherited Roth IRA?
- How are distributions from an inherited traditional 401(k) taxed for non-spouse beneficiaries?
Section 4: SPECIAL BENEFICIARY EXCEPTIONS
Section 5: PLANNING DISTRIBUTIONS AND NEXT STEPS
- What should I consider when planning distributions from an inherited 401(k) or IRA?
- When does it make sense to seek guidance for an inherited 401(k) or IRA?
Frequently Asked Questions
Section 1: UNDERSTANDING INHERITED 401(k) AND IRA ACCOUNTS
FAQ 1: What is the difference between inheriting a 401(k) and an IRA?
When you inherit a 401(k) or an IRA, the distribution rules are often similar, but the way the accounts are administered can differ. A 401(k) is an employer-sponsored plan, so distributions are handled through the plan administrator and investment options may be limited to what the plan allows. An IRA, by contrast, is held at a brokerage or financial institution and typically offers broader investment flexibility once it is properly retitled as an inherited IRA.
While both account types are generally subject to the same beneficiary rules, including the 10-year distribution requirement for many non-spouse beneficiaries, understanding who manages the account and what investment options are available can help you see how each inherited account fits into your overall financial picture.
FAQ 2: How did the SECURE Act change the rules for inherited retirement accounts?
The SECURE Act, which took effect in 2020 and was later clarified by SECURE 2.0, changed how most inherited 401(k)s and IRAs must be distributed. For many non-spouse beneficiaries, it eliminated the ability to “stretch” withdrawals over a lifetime and replaced it with a 10-year rule. Under this rule, the inherited account generally must be fully distributed by the end of the tenth year following the original owner’s death.
In addition, beginning in 2025, some beneficiaries are required to take annual required minimum distributions during the 10-year period if the original account owner had already started taking RMDs before passing away. There are important exceptions for certain eligible designated beneficiaries, including surviving spouses, minor children until they reach adulthood, individuals with disabilities or chronic illness, and beneficiaries close in age to the original owner. We find that understanding which category you fall into is essential, since the timing of distributions can affect both taxes and long-term planning.
Section 2: OPTIONS FOR SPOUSAL BENEFICIARIES
FAQ 3: What options are available if I inherit my spouse’s 401(k) or IRA?
As a surviving spouse, you generally have more flexibility than any other beneficiary when inheriting a 401(k) or IRA. In many cases, you can roll the inherited assets into your own IRA or eligible retirement account and treat them as your own. This approach allows the funds to continue growing tax deferred and lets you follow your own required minimum distribution timeline based on your age.
Another option is to keep the account as an inherited IRA, which may be useful in certain situations, such as if you are under age 59½ and need access to the funds without early withdrawal penalties. The right choice depends on your age, income needs, and overall retirement picture. We find that reviewing these options carefully helps ensure the inherited account supports your long-term financial security and fits with the rest of your planning.
FAQ 4: Can a surviving spouse roll an inherited 401(k) into their own IRA?
Yes, in most cases a surviving spouse can roll an inherited 401(k) into their own IRA. This option allows the assets to continue growing on a tax-deferred basis and shifts required minimum distributions to the spouse’s own RMD schedule rather than the original account owner’s. The rollover is typically completed through a direct transfer from the employer plan to an IRA in the spouse’s name.
This approach can help simplify retirement planning by consolidating accounts and applying a single set of distribution rules. However, whether a rollover is appropriate depends on factors such as age, income needs, and access to funds, which is why reviewing the option in the context of your overall plan is important.
Section 3: RULES FOR NON-SPOUSE BENEFICIARIES
FAQ 5: What is the 10-year rule for non-spouse beneficiaries of inherited retirement accounts?
For most non-spouse beneficiaries, the 10-year rule requires that the entire balance of an inherited 401(k) or IRA be withdrawn by December 31 of the year marking the tenth anniversary of the original owner’s death. This means you have flexibility in timing withdrawals, but the account must be fully distributed within that ten-year window.
If the original account owner had already begun taking required minimum distributions, current IRS guidance may require beneficiaries to take annual distributions during the 10-year period, with the remaining balance withdrawn by the end of year ten. How and when you take distributions can have meaningful tax consequences, so planning ahead matters.
FAQ 6: How does the 10-year rule apply to an inherited Roth IRA?
For non-spouse beneficiaries, an inherited Roth IRA is generally subject to the same 10-year rule as other inherited retirement accounts, meaning the account must be fully distributed by December 31 of the year marking the tenth anniversary of the original owner’s death. The key difference is how distributions are taxed. Because Roth contributions were made with after-tax dollars, qualified withdrawals from an inherited Roth IRA are typically income-tax free.
Unlike inherited Traditional accounts, annual required minimum distributions are usually not required during the 10-year period for inherited Roth IRAs, since the original owner was not subject to RMDs. This flexibility can make withdrawal timing an important planning decision, especially when coordinating with other income sources.
FAQ 7: How are distributions from an inherited traditional 401(k) taxed for non-spouse beneficiaries?
If you inherit a Traditional 401(k) as a non-spouse beneficiary, distributions are generally taxed as ordinary income in the year you take them. Because these accounts were funded with pre-tax contributions, the money has not been taxed before. Under current rules, most non-spouse beneficiaries must withdraw the full balance within 10 years of the original owner’s death, and those withdrawals are added to your taxable income each year.
How and when you take distributions matters. Large withdrawals in a single year can push you into a higher tax bracket, while spreading withdrawals over the 10-year period may help manage the overall tax impact. We often encourage looking at these decisions alongside your other income sources and tax considerations so distributions fit more smoothly into your broader financial picture.
Section 4: SPECIAL BENEFICIARY EXCEPTIONS
FAQ 8: Who qualifies for an exception to the 10-year rule on inherited retirement accounts?
Surviving spouses, minor children of the original account owner, disabled or chronically ill individuals, and beneficiaries who are no more than 10 years younger than the deceased qualify for exceptions to the 10-year rule. These eligible designated beneficiaries may be allowed to take distributions based on life expectancy rather than fully emptying the account within 10 years.
That said, these exceptions are not permanent in all cases. For example, once a minor child reaches the age of majority, the 10-year rule typically begins. Because these rules depend on personal circumstances and timing, it’s important to understand exactly which category applies before planning withdrawals.
Section 5: PLANNING DISTRIBUTIONS AND NEXT STEPS
FAQ 9: What should I consider when planning distributions from an inherited 401(k) or IRA?
When you’re planning distributions from an inherited 401(k) or IRA, it helps to start with how withdrawals will affect your income and taxes over time. We encourage you to look at your current and expected tax bracket, whether the account is Traditional or Roth, and how these withdrawals fit alongside your other income sources. With a Traditional inherited account, spreading distributions across the 10-year window can help you avoid a large tax spike in a single year. With an inherited Roth IRA, distributions are generally tax-free, which can give you more flexibility, even though the account still needs to be fully distributed within 10 years.
It’s also important to think about your needs and priorities. You may need some of the funds sooner, or you may prefer to leave assets invested longer for potential growth. When we look at inherited account distributions in the context of your full financial picture, it becomes easier to make choices that support both today’s needs and long-term security.
FAQ 10: When does it make sense to seek guidance for an inherited 401(k) or IRA?
It makes sense to seek guidance as soon as you inherit a 401(k) or IRA, before taking any distributions or making account changes. The rules around inherited retirement accounts are complex, especially after the SECURE Act, and early decisions can have long-term tax and planning consequences. We often see situations where timing, beneficiary status, and distribution strategy significantly affect overall tax exposure and cash flow.
At Liberty One Wealth Advisors, we help you understand your options within the context of your full financial picture. That includes reviewing inherited account rules, coordinating distributions with your existing income and tax situation, and ensuring the account fits into your broader financial plan. The goal is not to rush decisions, but to help you move forward with clarity and confidence during what is often a stressful time.
