New IRS rules require non-spouse beneficiaries to withdraw inherited 401(k) funds within 10 years, triggering significant tax liabilities.
A 59-year-old earning $135,000 must withdraw an inherited $640,000 401(k) within a decade under the SECURE Act, resulting in roughly $170,000 in federal and state taxes. The law eliminates the stretch IRA option for most heirs, accelerating taxable distributions.
The SECURE Act of 2019 changed inheritance rules for retirement accounts, affecting Gen X and older millennials who inherit from Baby Boomers. The average 401(k) balance for long-tenured savers is $267,900, but larger accounts face steeper tax burdens. Heirs must empty accounts within 10 years, often pushing them into higher tax brackets.
Delaying withdrawals until the final year can stack taxable income into the 32 to 35 percent brackets. Retiring early may allow distributions at lower 12 to 22 percent rates before Social Security begins, reducing tax exposure.