Inheriting a 401k From a Parent: Your Complete Options Guide

When you inherit your parent's 401k, you become the designated beneficiary with several important choices to make. Unlike inheriting cash, a 401k comes with specific rules and tax implications.

• **You are a non-spouse beneficiary:** Different rules than if a spouse inherited
• **10-year rule applies:** Must distribute entire balance within 10 years
• **Cannot roll to your own 401k:** Must stay as inherited account
• **Plan rules matter:** Each 401k plan has its own beneficiary options
• **Contact the plan administrator:** First step after inheriting

As a non-spouse beneficiary inheriting a 401k, you typically have these options:

• **Best for most:** Roll to inherited IRA for maximum flexibility
• **401k limitation:** You're stuck with the plan's investment menu
• **Inherited IRA advantage:** Choose any investment including precious metals

Rolling an inherited 401k to an inherited IRA gives you the most flexibility. Here's the process:

• **Direct rollover:** Funds go straight from 401k to inherited IRA, no withholding
• **Indirect rollover:** Avoid this - triggers 20% mandatory withholding
• **Account title:** Must say "Inherited IRA" or "Beneficiary IRA"
• **Timeline:** Usually 2-4 weeks for transfer to complete

1. 1Contact your parent's 401k plan administrator to confirm your beneficiary status
2. 2Open an inherited IRA at your chosen brokerage (titled properly)
3. 3Request a direct trustee-to-trustee transfer to avoid withholding
4. 4Complete required paperwork including death certificate
5. 5Choose investments once funds arrive in inherited IRA

Under the SECURE Act, you must empty the inherited 401k (or rolled-over inherited IRA) within 10 years. How you take distributions is up to you:

• **Equal annual distributions:** $50k from $500k each year spreads taxes evenly
• **Front-load in low-income years:** Take more when your other income is lower
• **Back-load with caution:** Don't create a year-10 tax bomb
• **Match with deductions:** Coordinate with years you have large deductions
• **Roth conversion:** Convert portions to Roth in lower tax brackets

Understanding the tax treatment helps you plan better:

• **Traditional 401k distributions:** Taxed as ordinary income in the year received
• **Roth 401k distributions:** Tax-free if account was open 5+ years
• **No 10% early withdrawal penalty:** Exception for inherited accounts
• **State taxes:** Most states tax distributions as income
• **Estate tax consideration:** Already paid by estate if applicable (rare)