A non-spouse heir who inherits a workplace 401(k) has a one-time tax option the code refuses to grant on an inherited IRA: rolling the balance directly into an inherited Roth IRA, paying income tax once, and never owing tax on that account again.
The rule turns on where the money sits at death. A designated non-spouse beneficiary named on a 401(k) form can instruct the plan to send the death benefit as a direct trustee-to-trustee transfer into an inherited Roth IRA. If the original owner had already moved the money into a traditional IRA before dying, that conversion right disappears permanently. No non-spouse can convert an inherited traditional IRA to a Roth; only a surviving spouse can.
The authority is Internal Revenue Code §402(c)(11), added by the Pension Protection Act of 2006, and IRS Notice 2008-30, which clarified that a non-spouse beneficiary may direct a qualified plan’s trustee to transfer the benefit into an inherited Roth IRA. The Worker, Retiree, and Employer Recovery Act of 2008 made those direct rollovers mandatory, so a plan administrator cannot refuse.
Picture a daughter who inherits her father’s $400,000 401(k). Rather than accept the default move into a traditional inherited IRA, she has the plan send the balance directly into an inherited Roth IRA. The account must be titled in her name as beneficiary. She owes ordinary income tax on the full $400,000 in the conversion year. After that, the account grows tax-free and every qualified withdrawal comes out tax-free.
The catch is the tax bill in a single year. Converting the entire pretax balance at once counts as ordinary income, which can push a beneficiary into the top bracket and phase out credits, Affordable Care Act subsidies and Medicare IRMAA thresholds. Tax should be paid with cash from outside the account; using plan withholding would count as a taxable distribution.
The move is also irrevocable. The Tax Cuts and Jobs Act ended Roth recharacterization, so a $400,000 conversion followed by a market drop still leaves the full pre-drop balance taxed. And taking a check payable to yourself first forecloses the option entirely, because non-spouse heirs cannot use the 60-day indirect rollover.
Eligibility is narrow. It applies to a non-spouse beneficiary—a child, grandchild, sibling, partner or friend—named directly on the plan’s beneficiary form, the document that controls the money rather than the will. Trusts qualify only if they meet the see-through rules. Anyone inheriting through an estate, or after the money has reached an IRA, is shut out.
For deaths after 2019, the SECURE Act’s 10-year rule still applies to the inherited Roth account, meaning it must be emptied by December 31 of the tenth year after the original owner’s death. The consumer advocate Clark Howard summed up the stakes bluntly: the tax code “hates them or hates the people who inherit the money and takes a lot of it in tax.”
Whether retirement savings stay in a 401(k) or move to an IRA before death decides whether an heir inherits a lifetime tax-free bucket or loses the option for good.