When Leslie’s husband died in late 2022, she was devastated, but grateful he had left behind a 401(k) with nearly $350,000 in retirement savings. After taking time to grieve, she contacted the employer’s plan administrator in early 2023. The account was transferred to her name, and she assumed she could leave it untouched while she figured out her own retirement needs. But the following spring, she received a notice: she was required to start taking distributions under the plan’s 10-year payout rule.
Leslie’s confusion is understandable. The rules around inherited retirement accounts, especially employer-sponsored 401(k)s, are not only complex but often conflict with what you might read online. Many surviving spouses assume they have the same flexibility with an inherited 401(k) as they would with an inherited IRA, but that isn’t always the case.
Here’s what you should do if you find yourself in Leslie’s situation.
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What are spouses entitled to when inheriting a 401(k)?
Spouses have unique options when inheriting a retirement account. Generally speaking, though, spousal beneficiaries can:
- Take a taxable lump sum distribution of the inherited account
- Roll the inherited 401(k) into their own IRA or 401(k)
- Leave the account in the deceased spouse’s employer plan and remain a beneficiary
Leslie chose the third option — keeping the money in her husband’s employer plan — because it seemed simplest. But by doing so, she unknowingly limited her choices and exposed herself to the plan’s 10-year payout requirement.
Rolling the account into your own IRA can offer the most flexibility, especially if you are under the age of 59½ and want to delay taking withdrawals. It allows the account to be treated as if it were yours all along, meaning you can defer distributions until required minimum distributions (RMDs) begin at age 73.
If Leslie had rolled the account into her own IRA, she could have waited until she reached age 73 to begin RMDs instead of being forced onto the 10-year schedule. However, not all employer plans allow a surviving spouse to keep the inherited 401(k) in place indefinitely. Many require the account to be distributed within 10 years, even though the SECURE Act gives spouses the option to be treated as the deceased spouse and delay taking RMDs until the age their spouse would have had to start taking them.
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What is the 10-year rule?
The 10-year rule requires that certain inherited retirement accounts be fully distributed by the end of the 10th year after the original account holder’s death [1]. Failure to do so can result in a 25% excise tax on the amount you should have withdrawn.
Under the SECURE Act, the 10-year rule applies to non-spouse beneficiaries, such as children, grandchildren, siblings or friends (though there are some exceptions). However, spouses were carved out as “eligible designated beneficiaries” and allowed to use older “stretch” provisions — meaning they could take RMDs based on their life expectancy instead.
That’s why Leslie was confused: she had read that spouses don’t have to follow the 10-year rule, but because she stayed in her husband’s employer plan, the plan’s stricter rules overrode the SECURE Act’s more generous provisions.
The catch? The 10-year rule can still apply to spouse beneficiaries if the inherited account stays within an employer-sponsored plan. That’s because plan administrators are not required to follow all the distribution options permitted by federal law. In other words, while the SECURE Act says one thing, the plan document can say another.
If the plan doesn’t permit life-expectancy-based payouts for spouses, the 10-year clock starts ticking the year after the account holder dies. In Leslie’s case, that meant starting distributions in 2024, whether she was ready or not.
How to protect yourself and stretch out withdrawals
If you’ve inherited a 401(k) from a spouse, here’s how you can protect your options:
1. Request the plan document
Ask the employer for the summary plan description and specific rules about inherited accounts. Confirm whether the plan follows the SECURE Act’s stretch provisions for spouses, or mandates the 10-year rule.
Had Leslie asked for the plan document right away, she would have learned earlier that the 10-year rule applied and could have considered a rollover instead.
2. Consider a spousal rollover
If you’re under 73 and don’t need the money right away, rolling the inherited account into your own IRA can reset the rules in your favor. It lets you delay RMDs and preserve tax-deferred growth for longer.
Leslie still has the option to explore a rollover, but she must act quickly before the plan deadlines close that door.
3. Don’t delay
Some plans give you only a limited window after your spouse’s death to elect a rollover. If you miss it, you may lose the ability to do it at all.
In Leslie’s situation, waiting more than a year meant she was already locked into the 10-year payout.
4. Talk to a financial advisor or tax professional
These decisions can be complicated and are often irreversible. A professional can help you decide whether to keep the account where it is, roll it over, or take distributions strategically to minimize taxes.
5. Factor in your own retirement plan
If you’re still working, your own 401(k) or IRA may already cover your retirement needs. That gives you room to stretch any inherited distributions over time if your plan allows it.
Because Leslie has her own retirement savings, she may be able to spread out the inherited withdrawals and avoid taking large lump sums.
When you inherit a 401(k) from a spouse, your options may appear more generous than what you get in practice. That’s why it’s critical to review the plan document as soon as possible and decide whether a spousal rollover makes sense for your situation.
Leslie’s story is a reminder that the best move may be to transfer the account into your own IRA while you still can. Otherwise, you could end up like her: forced to take taxable withdrawals under a timeline you didn’t expect.
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[1]. Valenti Wealth. "10 Things to Know About the Ten-Year Rule: Inherited Accounts and RMDs"
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