Search
Enter a search term.
line drawing document and pencil

File a claim

Need to file an insurance claim? We’ll make the process as supportive, simple and swift as possible.
Team

Action Teams

If you want to make an impact in your community but aren't sure where to begin, we're here to help.
Illustration of stairs and arrow pointing upward

Contact support

Can’t find what you’re looking for? Need to discuss a complex question? Let us know—we’re happy to help.
Use the search bar above to find information throughout our website. Or choose a topic you want to learn more about.

Inherited 401(k): Your options & tax implications

Rockaa/Getty Images

If you are a beneficiary of a loved one's 401(k), there are certain rules and tax implications you should know that can vary based on your relationship to the deceased, your age and other factors.

Here's an overview of your available options and the potential tax consequences of each.

Who can inherit a 401(k)?

When a 401(k) account holder dies, the balance in their account goes to the designated beneficiary—usually someone the account owner identified when they set up the account.

The relationship of the beneficiary influences the options available for inherited funds. Potential beneficiaries can include:

gold line

Options for spouse beneficiaries 

Spouses who inherit a 401(k) have several options, each with unique rules and tax implications. Consider these options carefully before taking any action:
1. Transfer the funds to a personal IRA or 401(k) 
One option available only to spouse beneficiaries is to roll the inherited funds into a personal IRA or another 401(k) plan. This move is usually the best option because it allows the money to continue to grow tax-deferred and be used as part of the recipient's retirement planning.

Required minimum distributions (RMDs) from the account will be based on the spouse's age, which is particularly beneficial if they are younger than the original 401(k) holder.
2. Leave the funds in the existing 401(k) plan 
If the plan allows, spouses can keep the funds in the deceased's 401(k) plan. This might be advantageous if the plan has exceptional investment choices.

A surviving spouse who leaves the inherited 401(k) in the existing plan may need to take RMDs, depending on their age and their spouse's age when they died. These RMDs are taxable and aren't subject to the early withdrawal penalty.
3. Take a lump-sum distribution 
Spouses can take a lump-sum distribution, although this choice often has the least desirable tax implications. While the beneficiary won't have to pay an early withdrawal penalty, the entire distribution amount is subject to income tax in the year it is received. This can push the recipient into a higher tax bracket. It's usually only a consideration when the beneficiary needs immediate access to the funds.

gold line

Options for non-spouse beneficiaries

Non-spouse beneficiaries have some of the same options as spouse beneficiaries. However, they don't have the option of rolling the funds into their own 401(k) or IRA.

Here are the strategies non spouses can use to manage an inherited 401(k).
1. Transfer to an inherited IRA 
Non-spouse beneficiaries can transfer the inherited 401(k) funds into an inherited IRA and allow the assets to continue growing tax-deferred. The beneficiary can't contribute further to the IRA or roll it into an IRA of their own.

In addition, all money must be withdrawn from the IRA within 10 years following the account holder's death. If they weren’t already taking RMDs, the IRS won’t mandate RMDs during those 10 years. However, if they were taking RMDs when they died, annual RMDs would continue to be required.
2. Take a lump-sum distribution 
Taking a lump-sum distribution means the full amount of the inherited 401(k) will be disbursed at once. This option is simple but can lead to substantial tax implications. The total distributed amount is considered taxable income in the year it's received, which could significantly increase your income taxes for that year and potentially push you into a higher tax bracket.

gold line

Options for trusts as beneficiaries

Naming a trust as the beneficiary of a 401(k) can be ideal for account holders with minors, dependents with special needs, or a desire for additional control over their assets. While this approach can offer significant advantages in terms of estate planning, it has unique tax implications.

First, the trust must receive distributions from the 401(k) plan (typically over 10 years) just as an individual beneficiary would. The terms of the trust then govern how those distributions are paid out to the trust beneficiaries.

However, there are some exceptions:

  • Non-individual trust beneficiaries. It's common to see trusts that include a charity, church or other organization as a beneficiary. However, if the trust names a non-individual as a beneficiary, IRS rules may require the 401(k) plan to fully distribute funds within five years of the account owner's death. 
  • Eligible designated beneficiary. Eligible designated beneficiaries can stretch payments over their lifetimes. In addition to surviving spouses, this category includes minor children of the 401(k) participant,1 disabled beneficiaries, chronically ill individuals and beneficiaries who are less than 10 years younger than the deceased. 

Considering the complexity of trusts and the potential tax impact of these options, trustees and other interested parties should seek advice from a financial advisor to ensure the management of the inherited 401(k) aligns with the trust's objectives and the beneficiaries' needs.

Want to pass wealth on to your loved ones?
Learn about generational wealth transfer strategies to protect and prolong family wealth.

What if you inherited a Roth 401(k)?

Inheriting a Roth 401(k) involves different considerations from those associated with a traditional 401(k) due to fundamental differences in tax treatment for each type of account.

With a traditional 401(k), contributions are made pre-tax and reduce taxable income in the year they are made. Taxes on contributions and earnings are deferred until withdrawal, at which point they are taxed as ordinary income.

Contributions to a Roth 401(k) are made with after-tax dollars, meaning there's no tax deduction at the time of contribution. Contributions and earnings grow tax-free, and withdrawals are tax-free in retirement provided certain conditions are met. Beneficiaries can avoid taxes on a Roth 401(k) inheritance as long as the account holder began making contributions to the account at least five years before the beneficiary started taking withdrawals.

For the 2024 tax year and beyond, RMDs aren't required from designated Roth accounts.

Making the right choice: Factors to consider

Deciding how to manage an inherited 401(k) involves weighing several factors, from your immediate financial needs to your long-term retirement strategy. These are key aspects to keep in mind:

  • Financial goals and timeline. Are you seeking asset growth over many years, or do you need immediate income? This will influence whether you roll funds into an inherited IRA for continued growth or take a lump-sum distribution. 
  • Current age and RMDs. Younger beneficiaries might benefit from rolling over to an inherited IRA to maximize tax-deferred growth over a longer horizon when this strategy is available to them. Older beneficiaries might need to start taking RMDs immediately to meet their financial needs. 
  • Potential growth and tax implications. Leaving the funds in an inherited account or rolling them into an inherited IRA could allow for continued growth with deferred taxes. In contrast, a lump-sum distribution could result in a significant tax burden in the current year. 

Navigating your inheritance

Inheriting a 401(k) involves a complex set of choices with significant tax and financial implications. As you navigate your decision, remember the importance of aligning your options with your long-term financial goals.

Connect with a financial advisor for tailored advice to help you determine the most beneficial and tax-efficient strategy, make the most of your inheritance, and honor your loved one's legacy.

Share
1 Funds within the trust will be disbursed to your child once they reach legal adulthood, or another age you specify.

Distributions of earnings are tax-free as long as your Roth IRA is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.
4.7.164