Calculate tax on inherited 401(k) distributions. Covers 10-year rule, NUA on employer stock, spouse rollover, and eligible vs non-designated beneficiary rules under SECURE 2.0.
Inherited 401(k) Rules Under SECURE 2.0 (2026)
The rules for inherited 401(k) accounts were significantly changed by the SECURE Act (2019) and SECURE 2.0 (2022). Your distribution timeline depends on your relationship to the deceased and when you inherited the account.
Distribution Rules by Beneficiary Type
Spouse:
Option 1: Roll into own IRA/401(k) β treat as your own
Option 2: Inherited IRA with stretch (life expectancy RMDs)
Option 3: Lump sum (fully taxable in year received)
Non-Spouse Designated Beneficiary:
10-year rule: Must empty account by Dec 31 of year 10
Annual RMDs required years 1-9 IF deceased had passed RMD age
Final year: entire remaining balance withdrawn
Eligible Designated Beneficiary:
Stretch IRA: RMDs over own life expectancy table
Minor children: stretch until age 21, then 10-year rule
Non-Designated Beneficiary (estate, charity, trust):
5-year rule if owner died before required beginning date
Owner's remaining life expectancy if died after RBD
Net Unrealized Appreciation (NUA) Strategy
If the inherited 401(k) holds appreciated employer stock, the NUA strategy may significantly reduce taxes. You take an in-kind distribution of the stock, paying ordinary income tax only on the original cost basis. The appreciation is taxed at long-term capital gains rates (0%, 15%, 20%) when sold β potentially saving thousands versus rolling the entire account to an IRA.
Frequently Asked Questions
What is the 10-year rule for inherited 401(k) accounts?
Under the SECURE Act and its update (SECURE 2.0), most non-spouse beneficiaries must withdraw the entire inherited 401(k) balance within 10 years of the account owner's death. Starting in 2025, annual Required Minimum Distributions (RMDs) are also required during years 1-9 if the original owner had already reached their RMD age. The entire account must be emptied by the end of year 10.
Can a spouse roll an inherited 401(k) into their own IRA?
Yes. Surviving spouses have the most flexibility. They can: (1) Roll the 401(k) into their own IRA or 401(k) β treating it as their own, using their own RMD schedule and deferring distributions as long as possible. (2) Keep it as an inherited IRA with the 10-year rule. (3) Take a lump sum (taxable). Rolling to their own IRA is usually the best option for younger surviving spouses to maximize tax-deferred growth.
What is Net Unrealized Appreciation (NUA) and when should I use it?
NUA applies when an inherited 401(k) contains employer stock. Instead of rolling everything to an IRA (and paying ordinary income tax on all distributions), you can distribute the employer stock in-kind to a taxable brokerage account. You pay ordinary income tax only on the original cost basis of the stock. The appreciation (NUA) is taxed at long-term capital gains rates (0%, 15%, or 20%) when you eventually sell the stock β which can be a significant tax savings if the stock has appreciated substantially.
What is an Eligible Designated Beneficiary?
Eligible Designated Beneficiaries (EDBs) are not subject to the 10-year rule and can use the "stretch IRA" β taking RMDs over their own life expectancy. EDBs include: surviving spouses, minor children of the deceased (until age 21), disabled individuals, chronically ill individuals, and beneficiaries not more than 10 years younger than the deceased. Once a minor child reaches age 21, the 10-year rule kicks in for the remaining balance.
What is the 5-year rule for non-designated beneficiaries?
Non-designated beneficiaries are entities β estates, charities, or trusts that do not qualify as designated beneficiaries. They face the 5-year rule: the entire inherited account must be distributed within 5 years of the account owner's death if they died before their required beginning date. If the owner died after their required beginning date, distributions can continue over the owner's remaining single life expectancy.