401(k) Tips

How Long Does it Take to Get 401k Inheritance?

After inheriting a 401(k), you should consider how long it will take to get the 401(k) inheritance. Here is the duration you have to wait for the payout.

3 min read

If you are a beneficiary of a 401(k) account, you will inherit the retirement assets behind by a 401(k) account holder. However, inheriting 401(k) retirement assets is not a straightforward process, and you will need to figure how much taxes you will owe on the distribution and how long you will have to wait to receive the funds.

If you are a spouse of the deceased 401(k) account holder, you can start receiving the 401(k) payments by year end following the account owner's death, or by the end of the year when the account owner would have reached age 70 ½. If you are a non-spouse beneficiary, you will receive 401(k) payments from the inherited 401(k) by end of the year following the account owner’s death.

What happens when you inherit a 401(k)?

Funds held in a 401(k) are usually tax-deferred, and this means you will owe taxes when you take a distribution. If a 401(k) account owner dies before exhausting the retirement savings, the 401(k) beneficiaries will be responsible for paying taxes on the inherited assets.

Usually, 401(k) account holders are required to name their beneficiaries on the 401(k) beneficiary designation form. If the original account holder was married, the spouse becomes the primary beneficiary and will get the 401(k) inheritance if he/she is alive.

However, if the spouse is not alive or opts to disclaim the assets, the retirement assets will be passed on to the contingent beneficiaries. As a beneficiary, your options with the inherited 401(k) depend on your relationship with the deceased 401(k) account owner, the year when the account owner died and his/her age at the time, and your age vis-à-vis the age of the account owner at death.

How long does it take to get 401(k) inheritance after the account owner's death?

The time it takes to receive the 401(k) inheritance can vary from person to person. If you are the spouse, you may choose to start receiving inherited 401(k) payments by year end following the account owner's death, or by the end of the year when the spouse would have reached 70 ½. A spouse has various distribution options, and they can choose to rollover to an IRA, take a lump-sum distribution, or spread distributions over their lifetime.

If you are a non-spousal beneficiary, you will start receiving inherited 401(k) payments by the end of the year following the account owner’s death. You can choose to receive the distributions over five years, and you will have until the 5th anniversary of the account owner's death to take a full distribution from the inherited 401(k). Non-spouse beneficiaries cannot stretch 401(k) payments over their lifetime or postpone distributions.

Usually, 401(k) plans are not equal, and each plan may have different rules. While the IRS sets the general rules of what 401(k) plans can do, individual 401(k) plans are allowed to set their own limits within the general framework. Once you inherit an IRA, you should check the summary plan description of the retirement plan to know how the plan handles distributions.

Inherited 401(k) Distribution Options

401(k) beneficiaries have the following distribution options for the inherited 401(k):

Rollover money into IRA

Spouses can delay paying taxes on the inherited 401(k) money by rolling it over to their IRA. The rolled over funds will be treated as if they had been yours all along, and they will continue growing tax-deferred until when you take money out. If you decide to withdraw funds from an IRA before you are 30, you will owe a 10% penalty in addition to ordinary income taxes.

Take a lump-sum distribution

You can also decide to withdraw the inherited assets from your 401(k) in one sweep. This option gives you an influx of cash in one instance, and it will push you to a higher tax bracket if the distribution occurs in a year of high income. The lump-sum distribution will be subject to state and federal income taxes, but you won’t pay an early withdrawal penalty even if you are below age 59 ½.

5-year and the 10-year rule

The five and ten-year rule mainly applies to non-spouse beneficiaries who are required to take a full distribution from the inherited 401(k) by the 5Th and 10th year after the account owner’s death. The five-year rule applies if the account owner passed away before 2019, while the 10-year rule applies if the account owner died after January 1, 2020.

This distribution option allows retirement savers to spread the tax liability over several years to reduce the tax bill. It gives beneficiaries greater flexibility with the retirement savings since they can take small distributions spread over several years, instead of taking a lump-sum distribution that could result in losing a bigger chunk of the 401(k) inheritance to state and federal taxes.

Life expectancy method

The life expectancy method allows beneficiaries to take the required minimum distributions based on their life expectancy. Beneficiaries can spread the distributions over several decades so that the money can continue growing. It also reduces the taxes you will owe in a specific period. This option is only available to surviving spouses, children who are below 18, as well as disabled or chronically ill beneficiaries.