What to Do When Inheriting a 401k From a Parent

When an individual is named the beneficiary of a parent’s 401(k), they are entitled to the assets held within that retirement account. This inheritance differs from other assets like a house or brokerage account because of specific tax rules and withdrawal regulations governing retirement funds. The Internal Revenue Service (IRS) has an established framework that dictates how and when a non-spouse beneficiary, such as a child, can access these funds. Beneficiaries must take specific actions to claim and manage the money in compliance with federal regulations.

Key Distribution Rules for Non-Spouse Beneficiaries

The SECURE Act of 2019 established the primary rules for non-spouse beneficiaries for deaths occurring after December 31, 2019. The main change was the 10-year rule, which mandates that most designated beneficiaries, including adult children, must withdraw the entire balance of the inherited 401(k) by December 31 of the tenth year following the parent’s death. Failure to empty the account within this timeframe can result in a substantial penalty.

The rules distinguish between a “designated beneficiary” and an “eligible designated beneficiary” (EDB). An adult child is a designated beneficiary subject to the 10-year rule. EDBs, such as minor children of the account owner or disabled individuals, have more flexible options. For a minor child, the 10-year clock does not start until they reach age 21.

Whether annual withdrawals, or required minimum distributions (RMDs), are necessary during the 10-year period depends on the parent’s age at death. If the parent died before their required beginning date (RBD) for taking their own RMDs, the beneficiary does not need to take annual RMDs. However, if the parent died on or after their RBD (age 73), the beneficiary must take annual RMDs in years one through nine and withdraw the remainder in year ten.

Due to confusion over this rule, the IRS waived penalties for missed RMDs from 2021 through 2024. For affected beneficiaries, these annual withdrawals are now expected to begin in 2025.

Available Withdrawal Options

A beneficiary has several paths to consider. A straightforward option is a lump-sum distribution, which means withdrawing the entire account balance at once. This provides immediate access to the funds, but the full amount is treated as ordinary income for that tax year and can result in a large tax bill.

A common and tax-efficient strategy is a direct rollover to an Inherited IRA. This process moves the assets from the parent’s 401(k) into a new IRA, allowing the funds to continue growing tax-deferred. This trustee-to-trustee transfer is not a taxable event, but the 10-year withdrawal rule still applies.

If the inherited account is a Roth 401(k), the rollover would be to an Inherited Roth IRA, and qualified distributions are tax-free. If the parent had a traditional 401(k), the rollover is to a traditional Inherited IRA, and distributions are taxed as ordinary income. A non-spouse beneficiary cannot roll the funds into their own existing IRA or 401(k); it must be a specifically titled Inherited IRA.

A third option is to disclaim the inheritance, which is a formal, irrevocable refusal to accept the assets. The disclaimer must be made in writing within nine months of the parent’s death, and the beneficiary cannot have accepted any benefit from the account. The assets then pass to the contingent beneficiary, which may be considered if the beneficiary does not need the funds and wishes for them to go to another person without gift tax implications.

Required Information and Documentation

To initiate a transfer or distribution, the beneficiary must gather specific information. This includes the parent’s full legal name, Social Security number, and date of death, as well as the beneficiary’s own personal information. A certified copy of the death certificate is required, as plan administrators will not process a claim without it.

Beneficiaries should obtain multiple certified copies. You will also need the plan-specific distribution or rollover request form, which is available from the 401(k) plan administrator, often the parent’s former employer’s benefits department or a financial institution.

When completing the forms, careful attention is needed for the titling of a new Inherited IRA. The account must be titled in a specific way to comply with IRS rules, such as: “[Parent’s Name], Deceased, for the benefit of [Child’s Name], Beneficiary.” This titling preserves the tax-deferred status of the account.

The Rollover and Distribution Process

The process begins by contacting the 401(k) plan administrator to state your intention and confirm you have the correct forms. The beneficiary must then submit the complete package, including the executed forms and the certified death certificate. It is best to send these documents via a secure, trackable method like certified mail or a secure online portal.

After submission, follow up with the plan administrator to confirm they have received all necessary documents and that the paperwork is in good order. The processing timeline can range from a few weeks to over a month. Once the rollover is complete, the funds will appear in the new Inherited IRA, and you will receive confirmation statements from both the old plan and the new custodian.