What Happens to Your 401(k) Depends on Who Inherits It

Inheriting a 401(k) is not quite like inheriting money in a savings account. The account comes with tax rules, withdrawal deadlines, and a surprising number of ways to make an expensive mistake. The choices also change depending on whether the person inheriting it is a spouse, adult child, grandchild, or someone else.

Two basics make the rest easier to follow. Money withdrawn from a traditional 401(k) is generally taxable income. Qualified withdrawals from a Roth 401(k) are generally tax-free, although inherited Roth accounts still have withdrawal deadlines. You will also see the term RMD, which means “required minimum distribution”—the minimum amount the IRS says must come out that year. Employer plans can offer fewer choices than federal law allows, so the plan administrator should always be the first call. This is general information, not personal tax advice.

A surviving spouse can usually keep the money as an inherited account or roll an eligible balance into an IRA in their own name. A rollover can make the account easier to manage, but it is not automatically the best answer.

A spouse younger than 59 1/2 may want access to some of the money. Withdrawals made as a beneficiary because of the owner’s death are generally exempt from the 10% early-withdrawal tax. After the money is rolled into the spouse’s own IRA, that protection can disappear until the spouse reaches 59 1/2, unless another exception applies. The spouse may also need to finish any RMD the owner failed to take in the year of death. In most 401(k) plans, the spouse is automatically the main beneficiary unless they signed written consent allowing someone else.

Most adult children must empty an inherited 401(k) by the end of the 10th year after the parent’s death. If the parent dies in 2026, that normally means the balance must be gone by Dec. 31, 2036.

What happens during those 10 years depends on whether the parent had reached the point when RMDs had to begin. If not, federal rules generally do not require a withdrawal in years one through nine. If RMDs had already begun, annual withdrawals generally must continue, and the account must still be empty by year 10. Waiting until the final year can create one very large tax bill because traditional 401(k) withdrawals count as income. A child can often make a direct rollover to an inherited IRA, but not an IRA in the child’s own name. Missing a required withdrawal can bring a tax penalty of up to 25%, although timely correction may reduce it.

A child of the 401(k) owner who is younger than 21 when the parent dies receives special treatment. If the plan allows it, withdrawals can be spread over the child’s life expectancy instead of immediately using the standard 10-year rule.

The extra flexibility does not last forever. For this federal retirement rule, the child becomes an adult at 21. Annual withdrawals generally continue, and the remaining balance must be emptied by the end of the year containing the 10th anniversary of the child’s 21st birthday. If the child turns 21 in 2028, the usual deadline is Dec. 31, 2038. This exception is specifically for a child of the person who owned the account. It does not automatically cover every young relative, and the employer’s plan still decides which permitted payment options are actually available.

A grandchild does not receive the special minor-child exception simply because they are younger than 21. A 12-year-old grandchild is usually treated like most other nonspouse beneficiaries and gets the standard 10-year deadline.

The answer can change if the grandchild separately qualifies as disabled, chronically ill, or no more than 10 years younger than the account owner. Otherwise, an account inherited after a 2026 death generally must be empty by Dec. 31, 2036. Annual withdrawals may also be required if the original owner had already started RMDs. Because a minor normally cannot control the account directly, a guardian, custodian, or trust may become involved under state law. That can change who manages the money, but it does not by itself extend the federal deadline. The IRS’s special minor exception applies to the owner’s child, not every minor beneficiary.

Family relationship is not the only thing that matters. A beneficiary who is no more than 10 years younger than the 401(k) owner belongs to a special group the IRS calls “eligible designated beneficiaries.” That can include an older parent, an older sibling, or a sibling only a few years younger than the person who died.

If the plan offers the option, that beneficiary may be able to take annual withdrawals based on life expectancy rather than emptying the account within 10 years. The age test uses actual birth dates, not just the ages someone happened to be on their last birthday. The federal regulations give a simple example: if the owner was born Oct. 1, 1953, a beneficiary born on or before Oct. 1, 1963 passes the test. The withdrawals are still generally taxable if the money came from a traditional 401(k).

A beneficiary who met the federal definition of disabled when the 401(k) owner died may be able to spread withdrawals over life expectancy instead of using the standard 10-year deadline. For an adult, the basic test is a medically documented physical or mental condition that prevents substantial work and is expected to result in death or continue indefinitely. A qualifying Social Security disability determination can satisfy the rule.

The timing of the paperwork matters. Documentation generally must reach the plan administrator by Oct. 31 of the year after the account owner’s death. For a death in 2026, that normally means Oct. 31, 2027. A serious diagnosis alone does not automatically qualify someone, and becoming disabled after the owner’s death does not create this special status. This is one case where contacting the plan administrator and a qualified benefits or tax professional early can prevent a costly surprise.

A chronically ill beneficiary may also qualify for life-expectancy withdrawals instead of the usual 10-year schedule. The phrase has a specific tax-law meaning; it does not cover every long-term medical condition.

One way to qualify is to be unable to perform at least two everyday activities—such as eating, bathing, dressing, or using the bathroom—without substantial help for a period expected to be lengthy and indefinite. A licensed health care practitioner must provide the required certification. As with a disabled beneficiary, the condition must exist when the owner dies, and the documentation generally must be given to the plan administrator by Oct. 31 of the following year. The IRS and Treasury regulations spell out these documentation rules. If the person qualifies and the plan allows life-expectancy payments, the account may stay invested and tax-deferred much longer.

An unmarried partner does not get the special spouse options, no matter how long the couple has been together. A partner who is 15 years younger than the owner will usually face the 10-year deadline unless they separately qualify as disabled or chronically ill.

The age gap can change the answer. If the partner is no more than 10 years younger than the owner, they may qualify for life-expectancy payments under the same age rule that can help a parent or similar-age sibling. A nonspouse beneficiary may also be able to make a direct rollover to an inherited IRA, but not an IRA treated as their own. “Direct” is important: the money should move from the 401(k) plan to the inherited IRA rather than being paid to the beneficiary first. The beneficiary form, the two birth dates, and the plan’s own rules can completely change the result—which is why this is not a great place to wing it.

IRS Beneficiary Rules
Federal RMD and Minor-Child Rules
Required Withdrawal Deadlines and Penalties
401(k) and IRA Rollover Rules
Early-Withdrawal Tax Exceptions