How Long Can You Hold an Inherited 401(k)? Your Withdrawal Timeline Explained

When you inherit a 401(k), one of the first questions that comes to mind is: how long do I have to make decisions about this money? The answer depends on several factors, including your relationship to the deceased account owner, their age at death, and which withdrawal strategy you choose. Understanding your timeline options can mean the difference between maximizing tax benefits or facing a massive tax bill all at once.

Understanding Your 401(k) Inheritance Options and Their Timelines

The moment you become eligible to receive an inherited 401(k), you enter a critical decision-making window. You’re not forced to act immediately, but the choices you make early on will determine how long you can keep the money invested and growing. Here are your main paths forward:

Immediate lump-sum withdrawal: Take everything out in one year. This is the fastest option but typically results in the highest tax liability.

The five-year rule: If the original account owner hadn’t yet reached age 70½, you can stretch withdrawals across five years. You control the timing—take it all in year one or spread it throughout the five-year window.

Lifetime distributions: For non-spouse beneficiaries who inherit from someone under 70½, the stretch 401(k) option lets you take distributions based on your life expectancy. This could mean decades of withdrawals.

Spousal rollover: If you’re the surviving spouse, you can roll the 401(k) into your own IRA, treating it as if you always owned it. This resets your withdrawal timeline to your own retirement needs.

Trustee-to-trustee transfer: You can move the inherited 401(k) into an inherited IRA, which offers more flexibility and potentially longer tax deferral periods.

The Critical Age Factor: 70½ Changes Everything

The deceased account owner’s age at death is the game-changer in determining your inheritance timeline. If they hadn’t yet reached 70½—the age when required minimum distributions (RMDs) kick in—you have more favorable options available.

If the account owner was under 70½: You qualify for the five-year rule or stretch 401(k) options, giving you significant flexibility in timing your withdrawals over an extended period.

If the account owner was 70½ or older: You must continue or accelerate their RMD schedule. You’ll typically need to withdraw at least as much as they would have been required to take annually. This limits how long you can defer distributions.

How Long Can You Actually Stretch an Inherited 401(k)?

The stretch 401(k) is where time becomes your greatest asset. Using IRS life expectancy tables, you can potentially take distributions over 40, 50, or even 60+ years, depending on your age when you inherit.

Here’s how it works: The IRS provides a life expectancy factor for your current age. You divide your inherited 401(k) balance by this factor to determine your minimum annual withdrawal. Each year, you subtract one from the previous year’s factor—you never go back to the original table. This creates a declining withdrawal amount that stretches the account across decades.

Example of the stretch timeline: Suppose you’re 58 when you inherit a $135,000 401(k). The IRS life expectancy factor for age 58 is 27.0. Dividing $135,000 by 27.0 means your first-year withdrawal is $5,000. The following year, when you’re 59, your factor becomes 26.0 (not 26.1 from the table—this is a critical mistake to avoid). Your next withdrawal is based on the account’s new value divided by 26.0. This process continues for decades, allowing compound growth and tax deferral to work in your favor.

The primary advantage of the stretch is clear: smaller annual tax hits and years of additional tax-deferred growth. You’re not locked into minimum withdrawals, either. You can always withdraw more than the required minimum if you need cash.

Important: Not All 401(k) Plans Allow the Stretch

Here’s the catch: employers aren’t required to offer stretch 401(k) provisions. If your inherited plan doesn’t allow it, don’t panic. You have a workaround: request a trustee-to-trustee transfer of the 401(k) assets into an inherited IRA. Inherited IRAs do allow stretches, so you’d maintain the longer withdrawal timeline even if the original 401(k) didn’t offer it.

Spouse Beneficiaries Get Extra Time Flexibility

If you’re the surviving spouse, you have an advantage: you can roll the inherited 401(k) into an IRA in your own name. This resets all the rules. The account is now treated as yours, so you can delay withdrawals until you reach 70½ and begin taking RMDs based on your own life expectancy—potentially adding years to your withdrawal timeline.

The downside: you lose penalty-free withdrawal options available to other heirs before age 59½. If you might need early access to the money, this strategy could be costly.

The Tax Timing Problem: Why Lump Sums Cost So Much

Taking the entire inherited 401(k) in one year might seem simple, but it creates an immediate massive tax bill. Since most 401(k) withdrawals are fully taxable income, a $200,000 inheritance could push you into a higher tax bracket entirely for that year, costing tens of thousands more in taxes than spreading withdrawals over time would.

This is why understanding your timeline matters: the longer you can stretch the withdrawals, the more you control your annual tax liability. A five-year or lifetime distribution strategy typically saves far more in total taxes paid compared to a lump sum.

Common Timing Mistakes That Cost Retirees Thousands

Outdated beneficiary designations: Life changes—marriage, divorce, children born, parents passing. If your beneficiary form hasn’t been updated in years, the wrong person might inherit, or the inheritance could go to your estate, facing probate delays and higher taxes.

Taking the lump sum without considering alternatives: Many heirs rush into this option without realizing they could have stretched the money across decades and paid far less in taxes.

Miscalculating RMDs: Confusing the heir’s life expectancy table with the original owner’s table, or incorrectly recalculating the factor each year, can trigger IRS penalties. The factor subtracts one each year—don’t restart the table.

Missing the five-year deadline: If you’re using the five-year rule, make sure the full balance is withdrawn by the end of the fifth calendar year following the owner’s death.

Planning Your Inherited 401(k) Timeline

The best strategy depends on your personal situation. Ask yourself: When do you need access to this money? Are you in a high tax bracket? Does your plan offer stretch options? Could you benefit from a spousal rollover?

The span of time you can hold an inherited 401(k) ranges from immediate (lump sum) to decades (stretch 401(k)). By understanding these options and their timelines, you can make a decision that honors the person who named you as beneficiary while maximizing the account’s value for your own financial security.