The Moment
You inherited a 401(k) from a parent, spouse, or other person who named you as beneficiary.
A 401(k) is different from an IRA in one important way: the plan administrator controls your options. Some 401(k) plans offer limited investment choices, mandatory lump-sum distributions, or restrictive timelines. Your first step is to understand what the plan allows — and in most cases, to roll the funds into an inherited IRA where you have full control.
The Strategy
Step 1 — Contact the plan administrator. Call the number on the 401(k) statement. Ask: What are the distribution options for beneficiaries? Can I do a direct rollover to an inherited IRA? Is a lump-sum distribution required?
Step 2 — Roll into an inherited IRA (usually the best move). A direct rollover to an inherited IRA at a brokerage of your choice gives you: more investment options (index funds vs limited 401(k) menu), flexible distribution timing, and the ability to implement a tax-smart distribution strategy.
Important: This must be a direct trustee-to-trustee transfer. Do not take a distribution and then try to deposit it — that triggers immediate taxation on the full amount.
Step 3 — Plan your distributions. Same 10-year rule as inherited Traditional IRAs. Spread distributions across years to stay in lower tax brackets. Take more in low-income years, less in high-income years.
Spouse exception: If you are the deceased's spouse, you can roll the 401(k) into your own IRA or 401(k) — no 10-year restriction. This is almost always the best option for spouses.
Run Your Numbers
Enter the inherited 401(k) value and your income level.
Inherited 401(k) Decision Tool
What to explore next
- →How do I choose a brokerage for the inherited IRA rollover?
- →What is the NUA strategy for inherited company stock?
- →Should I convert inherited 401(k) distributions to a Roth?
Frequently Asked Questions
Can I just cash out the entire 401(k)?
You can, but it is usually a terrible idea. The full amount is added to your taxable income for the year. A $200,000 inherited 401(k) cashed out at once could cost $50,000-$70,000 in federal and state taxes. Spreading distributions over 10 years can save $15,000-$30,000 in taxes.
What if there are company stock shares in the 401(k)?
Company stock in an inherited 401(k) may qualify for Net Unrealized Appreciation (NUA) treatment, where the stock's growth is taxed at capital gains rates instead of ordinary income rates. This can save significant taxes. Consult a CPA before rolling over a 401(k) that contains company stock.