What Happens to a $900,000 401(k) When the Owner Dies and the Beneficiary Falls Under the New 10 Year Rule

Non-spouse heirs of inherited 401(k)s no longer use the prior “stretch” approach. Under the SECURE Act 10-year rule effective for deaths after 2019, the remaining balance must be distributed by December 31 of year 10, and final IRS regulations require mandatory annual RMDs during years one through nine. Enforcement of annual RMDs was waived from 2021 through 2024, but annual RMDs apply starting in 2025. For a $900,000 inherited 401(k) earning about 6% inside the account, distributions and residual balance can generate roughly $1.6 million of taxable income over the decade. High-income California residents may face combined marginal rates above 41%, producing an estimated $375,000 to $450,000 income tax bill if no planning is done.

"Run the cumulative tax over the full 10 years and the bill lands somewhere in the $375,000 to $450,000 range, a 40% to 50% haircut on the net inheritance. The exact number depends on growth and bracket placement, but the order of magnitude is the headline. Roughly half of the inheritance can be lost to income tax if the heir does nothing strategic."

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