Inherited 401(k) Rules: The 10-Year Rule, RMDs and Taxes for High-Income Families

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

If you inherit a 401(k) from a parent, federal rules generally require you to empty the account by December 31 of the 10th year after the year they died, and pre-tax money you take out of a traditional 401(k) is taxed as ordinary income. If your parent had already reached their required beginning date for distributions (generally April 1 of the year after they turned 73, or later if they were still working for the employer that sponsors the plan and did not own more than 5% of it), you must also take a minimum distribution in each of years 1 through 9. A surviving spouse, and a minor child of the person who died, get different and more flexible rules.

For a household already earning $750,000 or more in W-2 income, the rule itself is simple. The hard part is timing: every withdrawal lands on top of your salary and RSU income, so the question is less “how do I comply” and more “in which of the next ten years is this money taxed least.”

The inherited 401(k) rules that apply to most adult children

The SECURE Act changed the rules for anyone who died after December 31, 2019. Before then, an adult child could “stretch” withdrawals over their own life expectancy. That option is gone for most heirs. The IRS RMD FAQs and IRS Publication 590-B set out the current framework:

1. The 10-year rule. A “designated beneficiary” who is not an eligible designated beneficiary must withdraw the full balance by the end of the 10th year following the year of death. A parent who dies in 2026 means the account must be empty by December 31, 2036.
2. Annual RMDs if your parent died on or after their required beginning date. Under the final regulations, you take a yearly minimum based on your life expectancy (or your parent’s remaining life expectancy, if longer) in years 1 to 9, then empty the rest in year 10. IRS Notice 2024-35 and earlier notices excused missed yearly amounts for 2021 through 2024, and the final regulations apply to distributions for 2025 onward.
3. No annual RMDs if your parent died before that date. You still must finish by year 10, but nothing is required in years 1 to 9. That gives you room to pick your years.
4. No 10% early withdrawal penalty. Distributions after the account owner’s death are exempt from the 10% additional tax, whatever your age (IRC §72(t)(2)(A)(ii), IRS exceptions table).
5. A missed RMD is expensive. The shortfall may be subject to a 25% excise tax, reduced to 10% if corrected within two years (IRS RMD FAQs).
6. Inherited Roth 401(k) money is different. Beneficiaries of designated Roth accounts are still subject to the 10-year deadline, but under the final regulations an owner whose entire account is Roth is treated as dying before the required beginning date, so there are no yearly minimums, and qualified withdrawals are tax-free. Many heirs leave Roth money invested until late in year 10.

Who gets more flexible 401(k) beneficiary rules

“Eligible designated beneficiaries” are not forced into the 10-year window from the start. They are:

• the surviving spouse,
• a minor child of the account owner (not a grandchild),
• a disabled or chronically ill beneficiary, and
• anyone not more than 10 years younger than the account owner.

A surviving spouse has the most choices, including rolling the account into their own IRA and treating it as their own. A minor child of the owner can take life-expectancy payments until age 21, then the 10-year rule starts. The final regulations set the age of majority at the 21st birthday (Treas. Reg. §1.401(a)(9)-4(e)(3)) and require the balance out by the end of the 10th calendar year after that. In practice, a child who inherits at age 6 has until the end of the year they turn 31 to empty the account.

What your options are once the plan notifies you

A 401(k) plan is not required to offer every option the law allows. Many plans pay a non-spouse beneficiary a lump sum, or require the balance out within a set period. So the first practical decision is usually where the money sits:

One trap: a non-spouse beneficiary cannot take a check and redeposit it within 60 days. If the plan sends the money to you personally, it is a taxable distribution. Ask for a direct trustee-to-trustee transfer, and keep the account titled as an inherited IRA (Pub 590-B).

How inherited 401(k) withdrawals are taxed in California and Washington

There is no federal inheritance tax. The tax you pay is income tax on each withdrawal, plus estate tax at the parent’s level only if the estate was large enough. For 2026 the federal estate and gift exclusion is $15,000,000 per person (IRS). If federal estate tax was paid on the 401(k), you may be able to deduct that estate tax against the income as you withdraw it (Pub 590-B, “income in respect of a decedent”).

California. Withdrawals are taxed as ordinary income at California rates, which top out at 13.3% (12.3% plus the 1% Behavioral Health Services Tax on taxable income over $1,000,000, 2025 schedules; FTB). CA SDI does not apply, because a distribution is not wages.

Washington. Washington has no individual income tax in 2026 (WA DOR), and its capital gains tax (7%, or 9.9% on taxable gains over $1,000,000) exempts retirement accounts. That changes for high earners: Washington enacted a 9.9% tax on AGI over $1,000,000 effective January 1, 2028, with details still pending from DOR. A Washington family inheriting in 2026 has a real reason to think about taking more in 2026 and 2027. Separately, Washington has its own estate tax: for deaths from July 1 to December 31, 2026, the exclusion is $3,000,000, and if the parent was a Washington resident, their 401(k) counts toward it (WA DOR).

Worked example: an $800,000 inherited 401(k) on top of a $900,000 household

Assumptions: a married couple in San Mateo County filing jointly, taxable income of $850,000 from salary and RSUs, flat every year (for simplicity, the same figure for federal and California). One spouse inherits an $800,000 traditional 401(k) from a parent who died in 2026. We use 2026 federal brackets and 2025 California brackets (2026 CA schedules are not yet published), ignore investment growth, and treat the income as level each year.

Option A: spread it evenly, $80,000 a year for ten years. Each $80,000 sits in the 37% federal bracket (over $768,700 for 2026), so federal tax is $29,600 a year. In California it spans the 10.3% and 11.3% brackets, about $8,625. Total: about $38,225 a year, or about $382,250 over ten years.

Option B: take it all in year one. Federal tax is $296,000 (all at 37%). California tax rises by about $98,125, because the income climbs through the 10.3%, 11.3% and 12.3% brackets and $650,000 of it is over the $1,000,000 line for the extra 1%. Total: about $394,125.

The difference is only about $11,900. For a household already in the top federal bracket, spreading evenly barely helps. What does help:

• Pick your low-income years. If one spouse takes a year off, goes on extended leave, or retires early and taxable income drops to $300,000, there is $103,550 of room left in the 24% bracket (up to $403,550, 2026 figures). Taking $100,000 that year instead of in a 37% year saves roughly $13,000 of federal tax, before the California difference.
• Use the time for tax-deferred growth. If your parent died before their required beginning date, you can let the account grow for up to ten years and withdraw in the best years.
• Watch where you live when you withdraw. A family moving from California to Washington typically pays no state income tax on withdrawals taken as a Washington resident in 2026 or 2027, subject to California’s residency rules for the year of the move.

If you are the one leaving a 401(k): naming beneficiaries with young children

The same rules apply in reverse to your own 401(k), which for many of our families is the largest single account they hold. Three points matter most with kids under 12:

1. Your spouse usually has to be the primary beneficiary. Most 401(k) plans must pay a married participant’s balance to the surviving spouse unless the spouse consents in writing to someone else (IRC §401(a)(11) and §417). A signed spousal waiver is needed before naming a trust as primary.
2. Do not name a minor child directly. A plan will not pay a 7-year-old. Without a custodian or trust in place, a court may have to appoint a guardian of the child’s estate. In California, a transfer under a will or trust can hold money in a UTMA account until age 25 at the latest; see what happens to UTMA when a child turns 21.
3. A trust as contingent beneficiary gives the most control. Your children, as minor children of the owner, keep eligible designated beneficiary status until 21, then have ten years. A trust can decide how much reaches a 21 to 31 year old and when. The trust must be drafted to qualify for these rules, which is work for your estate attorney. Our guide to naming a trust as beneficiary covers the mechanics, and how beneficiary account names work covers the paperwork.

Beneficiary forms override your will. After a job change, the old plan’s form still controls that account. Check every plan once a year and after every new child.

Common mistakes with inherited 401(k) accounts

• Taking the plan’s default lump sum without asking about an inherited IRA transfer.
• Missing a yearly RMD because nobody noticed the parent had passed their required beginning date.
• Waiting until year 10 and taking the whole balance in one top-bracket year.
• Assuming a grandchild gets the minor-child rules. Only the owner’s own child does.
• Leaving an ex-spouse or a deceased parent on an old employer’s beneficiary form.

What to write down for your kids

An inherited account is often the first time children see family money move from one generation to the next. Write a one-page note: what the account was, why you chose your withdrawal years, and what you did with the money. Your children will likely inherit the same kind of account from you, under rules similar to these. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

Frequently asked questions

Do I pay tax when I inherit a 401(k)?

Not when you inherit it. You pay federal and state income tax when you withdraw from a traditional 401(k), at your own ordinary rates. There is no federal inheritance tax. Estate tax, if any, is paid by the parent’s estate, and only above $15,000,000 per person for 2026 at the federal level. Washington’s own estate tax starts much lower.

Can I roll an inherited 401(k) into my own IRA?

Only a surviving spouse can treat it as their own. Anyone else can move it by direct trustee-to-trustee transfer into an inherited IRA titled for their benefit. You cannot add contributions to that account, and a 60-day rollover of a check made out to you is not allowed. It becomes a taxable distribution.

What if I inherited the 401(k) before 2020?

If the owner died before January 1, 2020, the older rules generally still apply, and a designated beneficiary may keep taking life-expectancy payments. The 10-year rule then applies after that beneficiary dies. Check the plan or IRA records for which schedule you are on.

Your next step

If you have inherited a 401(k), get the plan’s beneficiary claim packet and ask two questions before signing anything: does the plan allow a direct transfer to an inherited IRA, and had your parent reached their required beginning date? Then map the next ten years of expected income, including leaves, vesting cliffs and any planned move. If you want a second set of eyes, our tax management and estate planning work at Age Five Family Office™ covers both sides: the account you inherit and the one you will leave.

This is general education, and the right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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