May 21, 2026
A lot of children assume they’ll get their inheritance from parents in a will. But there are other ways to inherit wealth, like as the designated beneficiary of a loved one’s 401(k) or IRA.
The upside of inheriting a retirement account is that it’s not subject to probate, unlike other assets outlined in a will. But the accounts may be subject to other conditions. That’s where things get complicated.
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Imagine someone like Drew, whose father Brian raised him alone. Sadly, Brian died of cancer in his late 40s while Drew was still in high school. Brian had designated his son as a beneficiary of his 401(k) through a trust.
Drew’s uncle Jim took him in and served as estate trustee, waiting for Drew to reach the age of majority, which he’s about to do as he’s turning 18.
Up until now, Jim has been tight-lipped about the 401(k). Drew wants to know how much it is, if he should cash it in, let it grow or if there are other options. There’s a lot to consider — legally and financially.
Options for children who inherit retirement accounts
In this case, Drew would be considered a ‘non-spouse’ beneficiary of the 401(k). Non-spouses have a few options when it comes to inherited 401(k)s, IRAs and Roth IRAs.
It’s wise to consult a lawyer and a certified financial planner or CPA because each option carries legal and tax implications.
Option 1: Receive money through a trust
The IRS considers children who are minors at the time they inherit a 401(k) to be ‘eligible designated beneficiaries.’ This category also includes people with disabilities or chronic illnesses. Through a trust, they can receive payments through the 401(k) over the course of their entire lifetimes.
While Drew’s father set up a trust for Drew, he set it up as a minor’s trust, one that would wind down when Drew reached the age of 18.
That means Drew can receive money from the 401(k) — potentially all of it — this year. It also means he has to withdraw it within a certain amount of time.
Option 2: Cash in the inherited account
This may appeal to someone like Drew who wants to go to college. The problem is that cashing in an inherited 401(k) or IRA all at once will immediately trigger higher taxes. It’s considered personal income. It may bump you up into a higher tax bracket.
The income taxes may be waived in the case of some inherited Roth IRAs.
Option 3: Transfer an inherited 401(k) into an inherited IRA and let it grow
Drew doesn’t have the option to transfer it into an IRA because he wasn’t named as a beneficiary of an IRA or Roth IRA. He only inherited a 401(k).
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For children who inherit both a 401(k) and an IRA from someone who has died since Jan. 1, 2020:
- You can only transfer your inherited 401(k) funds to your inherited IRA account. You can’t roll it into your own personal IRA.
- If your loved one died any time from Jan. 1, 2020 onward, you must withdraw all funds out of the inherited IRA account within 10 years of your loved one’s death via Required Minimum Distributions (RMDs) per the federal Secure 2.0 Act. If you don’t, the IRS can charge a 25% penalty on the amount that remains in the account. One way to limit the tax impact of this is to withdraw more in years when you earn less, say if you are laid off or take a sabbatical.
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What to consider if you name a child as beneficiary of your 401(k)
If you’re planning to designate a child as a beneficiary of your 401(k) or an IRA, be aware that if you die before the child has reached the age of majority in their state (usually 18, sometimes 21), someone will have to guard the account while the child is a minor.
If you want to handpick the guardian, you must set up a minor’s trust and name a trustee. If you don’t, the court will choose a guardian or conservator for you. As the law firm Hellmuth & Johnson notes, that’s costly.
You may also want to set some conditions on the release of the funds when your child turns 18, if you are concerned about their inheriting a lot of cash at a young age. Not only could that present a tax liability, but a personal financial risk if they’re not knowledgeable about how to spend a windfall responsibly.
You can set up a conduit trust to protect the 401(k) even after the child turns 18, with the trust releasing RMDs to the child at regular intervals. A trustee could release more funds to the child upon request, but it would be at the trustee’s discretion — not the child’s..
Alternatively, you could set up an accumulation trust, in which RMDs would flow to the trust and may or may not be released to the child. The funds would still have to be withdrawn by the time the child is 31. The upside is that this kind of trust may protest the funds from outside creditors. But it comes with major tax implications if there are any funds remaining the the trust when the child turns 31.
Before proceeding with any option, make sure you are aware of all the legal, financial and emotional impacts. The goal is to transfer wealth, not headaches, to the next generation.
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Laura Boast is an Associate Editor with Moneywise.com and a lifelong content creator who has reached international audiences at Discovery, CBC, Blue Ant Media, Bond Brand Loyalty and more.
