Inheriting your late parent's 401(k) can trigger a 25% IRS penalty if you don't follow the withdrawal rules

A batch of children presume they’ll get their inheritance from parents successful a will. But determination are different ways to inherit wealth, similar arsenic the designated beneficiary of a loved one’s 401(k) oregon IRA.

The upside of inheriting a status relationship is that it’s not taxable to probate, dissimilar different assets outlined successful a will. But the accounts whitethorn beryllium taxable to different conditions. That’s wherever things get complicated.

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Imagine idiosyncratic similar Drew, whose begetter Brian raised him alone. Sadly, Brian died of crab successful his precocious 40s portion Drew was inactive successful precocious school. Brian had designated his lad arsenic a beneficiary of his 401(k) done a trust.

Drew’s uncle Jim took him successful and served arsenic property trustee, waiting for Drew to scope the property of majority, which he’s astir to bash arsenic he’s turning 18.

Up until now, Jim has been tight-lipped astir the 401(k). Drew wants to cognize however overmuch it is, if helium should currency it in, fto it turn oregon if determination are different options. There’s a batch to see — legally and financially.

Options for children who inherit status accounts

In this case, Drew would beryllium considered a ‘non-spouse’ beneficiary (1) of the 401(k). Non-spouses person a fewer options erstwhile it comes to inherited 401(k)s, IRAs and Roth IRAs.

It’s omniscient to consult a lawyer and a certified fiscal planner oregon CPA due to the fact that each enactment carries ineligible and taxation implications.

Read More: Here’s the mean income of Americans by property successful 2026. Are you falling behind?

Option 1: Receive wealth done a spot

The IRS considers children who are minors astatine the clip they inherit a 401(k) to beryllium ‘eligible designated beneficiaries (2).’ This class besides includes radical with disabilities oregon chronic illnesses. Through a trust, they tin person payments done the 401(k) implicit the people of their full lifetimes.

While Drew’s begetter acceptable up a spot for Drew, helium acceptable it up arsenic a minor’s spot (3), 1 that would upwind down erstwhile Drew reached the property of 18.

That means Drew tin person wealth from the 401(k) — perchance each of it — this year. It besides means helium has to retreat it wrong a definite magnitude of time.

Option 2: Cash successful the inherited relationship

This whitethorn entreaty to idiosyncratic similar Drew who wants to spell to college. The occupation is that cashing successful an inherited 401(k) oregon IRA each astatine erstwhile volition instantly trigger higher taxes. It’s considered idiosyncratic income. It whitethorn bump you up into a higher taxation bracket.