My sister died and left me as the beneficiary on her 401(k). I could really use the cash — but should I let this nest egg mature or crack into it now?

He could use the funds to pay off debt, but he’s also considering the possibility of keeping the money invested for long-term investment.

If you’re in a similar situation, here’s what you need to know about handling an inherited 401(k) — and how to prepare in advance so you’re financially ready when facing loss.

What happens to a 401(k) when someone passes away?

When someone opens a 401(k), they’re asked to name one or more beneficiaries. If no beneficiary is listed, the account typically goes through probate — a lengthy and often costly legal process that may result in the funds going to someone the deceased never intended.

For married couples, 401(k) assets usually pass automatically to the surviving spouse, unless the spouse has signed a waiver allowing someone else to be named.

For single individuals, it’s especially important to be explicit about a beneficiary — otherwise, the account could default to next of kin, which may exclude a partner, friend, or sibling.

In Liam’s case, his sister may have named him because she felt her parents were already financially secure, and likely didn’t expect to pass away before them.

With over 40% of U.S. adults living without a spouse or partner, according to the Pew Research Center, clearly designating beneficiaries is a crucial part of estate planning.

Once a beneficiary is named, they typically have the option to move the 401(k) into an inherited IRA. Under current IRS rules, most non-spouse beneficiaries must withdraw the full balance within 10 years, and all distributions are subject to income tax.

However, some individuals qualify as Eligible Designated Beneficiaries (EDBs), which allows them to take required minimum distributions (RMDs) over their life expectancy instead of following the 10-year rule.

EDBs include:

• Surviving spouses
• Minor children (until age 21)
• Disabled or chronically ill individuals
• Beneficiaries less than 10 years younger than the account holder

If Liam has a disability or is close in age to his sister, he may qualify for an EDB. This option could help reduce his annual tax burden; however, RMD amounts vary based on age, IRS tables, and other factors. Therefore, it’s worth consulting a financial advisor to evaluate the best path forward.

Withdrawing the 401(k)

Liam generally has 10 years from the date of his sister’s death to fully withdraw the funds from the inherited 401(k), once it's transferred into an inherited IRA. All withdrawals are subject to income tax, but no early withdrawal penalties apply because the account was inherited.