Your Dad’s 401(k) Plan May Not Be as Flexible as an IRA. Here’s How Moving It to an Inherited IRA Keeps the 10-Year Clock on Your Side
When a 401(k) plan mails the beneficiary a check, the tax damage is already done and nothing in the tax code can undo it. The window to act is narrower than most heirs realize, and missing it turns a manageable…
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Imagine a taxpayer facing this situation. A 58-year-old single woman earning $90,000 a year inherits her father’s $400,000 401(k). He died in 2025 at 70. She sends in the claim forms, and the plan mails her a check for the whole balance. The plan deducts $80,000, and the full inheritance lands on her 2026 tax return.
She could have avoided that. One provision of the tax code lets her move the account into an inherited IRA, where the 10-year rule gives her a decade to spread out the tax bill. Here’s what the move is worth and how it works.
Lump Sum vs. 10-Year Spread: A $34,000 Swing
Start with her baseline. Her salary minus the $16,100 standard deduction for single filers in tax year 2026 leaves $73,900 of taxable income and $10,970 of federal tax.
Add the lump sum and her gross income jumps to $490,000. Think of brackets as buckets that fill in order. The inheritance sits on top of her salary, fills the 22%, 24% and 32% brackets, and pours deep into the 35% bracket, which covers income over $256,225 for individual filers in 2026. Her federal tax rises to about $134,634. The inheritance alone costs her $123,664.
Now say she takes $40,000 a year for 10 years instead. Only $8,200 of each year’s withdrawal falls into the 24% bracket, which starts at $105,700. Everything else stays at 22%.
| 2026 federal math (single filer) | Lump sum | 10-year spread |
|---|---|---|
| Inherited 401(k) income per year | $400,000 | $40,000 |
| Extra federal tax per year | $123,664 | $8,964 |
| Total extra federal tax | $123,664 | $89,640 |
Spreading out the withdrawals saves about $34,024, and that’s before considering the tax-deferred growth on money that stays invested. This example assumes her salary stays flat and brackets stay at 2026 levels. Brackets rise with inflation each year. State income tax adds to both columns, and how much depends on where she lives.
Section 402(c)(11) Moves Dad’s 401(k) Into an Inherited IRA
Each employer plan sets its own payout options for beneficiaries, and some offer only a lump sum. The way out is section §402(c)(11). It allows a direct trustee-to-trustee transfer from a deceased employee’s plan to an inherited IRA set up for a designated beneficiary who isn’t the surviving spouse. The law treats that transfer as an eligible rollover distribution and treats the receiving account as an inherited IRA.
The transfer has to go straight from the plan to the inherited IRA also known as a trustee-trustee transfer. Once a check is made out to you, the money considering as taxable income, and §402(c)(11) won’t let you deposit it later. The rules for inherited accounts under §408(d)(3)(C) also block non-spouse heirs from using 60-day rollovers. A direct transfer avoids the 20% withholding that § 3405(c) requires on eligible rollover distributions paid to you. Surviving spouses have their own, broader rules under § 402(c)(9).
How the 10-Year Clock Runs After the Transfer
A beneficiary who isn’t an “eligible designated beneficiary” must empty the account by December 31 of the year containing the 10th anniversary of the owner’s death. For a 2025 death, the IRS sets that deadline at December 31, 2035.
When you have to take money out along the way depends on Dad’s age when he died. If he died before his required beginning date, Publication 590-B says “no distribution is required for any year before the 10th year.” For anyone born in 1951 or later, that date is linked to age 73, so a father who died at 70 qualifies. If he died after that date, IRS Notice 2024-35 says the beneficiary “must take an annual RMD” each year as well. The final regulations behind that rule apply starting in calendar year 2025.
If you miss a required withdrawal, §4974 charges a 25% excise tax on the shortfall. The rate drops to 10% if you fix the mistake within the correction window. Eligible designated beneficiaries, a short list that includes surviving spouses and the owner’s minor children, can choose life-expectancy payouts instead.
Three Moves That Keep the 10-Year Clock Working for You
- Set up the transfer before you cash anything. Open an inherited IRA titled for your benefit as Dad’s beneficiary. Then ask the plan in writing for a direct transfer under § 402(c)(11). Do this before you sign any lump-sum election.
- Fill your bracket every year. Waiting until year 10 to take most of the money just recreates the lump-sum spike. In 2026, the 22% bracket ends at $105,700 of taxable income for an individual filer. Withdraw enough each year to reach about that line.
- Take bigger withdrawals in low-income years. If you retire before you claim Social Security, those gap years are a cheap time to pull money out. Medicare premiums are based on your income from two years earlier, so a large withdrawal at 63 can raise your premiums at 65.
The right annual withdrawal depends on your salary, retirement date, and state taxes, so it’s worth running the numbers with a CPA or fiduciary advisor well-versed in estate planning before the plan sends that check.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
