# The inherited 401(k) loophole most heirs never hear about

> A non-spouse heir can roll a workplace 401(k) straight into an inherited Roth, but only while the money is still at the employer.
- Title: The inherited 401(k) loophole most heirs never hear about
- Summary: A non-spouse heir can roll a workplace 401(k) straight into an inherited Roth, but only while the money is still at the employer. If a parent's retirement…
- Keywords: inherited ira, 401k, roth conversion, estate planning, taxes, business, finance, inherited, 401, loophole, most, heirs
- Source: Yahoo Finance — https://finance.yahoo.com/markets/options/articles/she-inherited-her-father-400-144750128.html
- Published: 2026-09-13T14:47:50+00:00
- Read time: 2 min
- Topics: inherited ira, 401k, roth conversion, estate planning, taxes, business, finance
## A one-time escape hatch
Name a non-spouse on a workplace 401(k) and they can roll it straight into an inherited Roth IRA. Pay income tax once, then never again on that account.
## The $400,000 example
A daughter inherits her father's $400,000 401(k). Instead of the default traditional inherited IRA, she has the plan wire it directly into an inherited Roth titled in her name.
## One week could erase it
Had her father moved that same money into a traditional IRA before he died, the option would be gone. Non-spouse heirs cannot convert an inherited traditional IRA. Only a surviving spouse can.
## Where the right comes from
Internal Revenue Code §402(c)(11), added by the Pension Protection Act of 2006, plus IRS Notice 2008-30. A 2008 law made the direct rollover mandatory, so the plan administrator cannot say no.

> the tax code hates them or hates the people who inherit the money and takes a lot of it in tax
## Who qualifies
Any non-spouse named directly on the beneficiary form: child, grandchild, sibling, partner, friend. Trusts count only if they meet the see-through rules.
## Who gets shut out
You lose it if the money already sits in an IRA at death, if you inherit through the estate instead of as a named beneficiary, or if you accept a check before requesting the transfer.
## Move it trustee to trustee
Confirm you are on the beneficiary form, open an inherited Roth titled "[Father's Name], deceased, IRA F/B/O [Your Name], beneficiary," and have the plan send it direct. Never touch the funds.
## Pay the tax from outside
Estimate federal and state tax on the full pretax balance and cover it with cash from elsewhere. Plan withholding counts as a taxable distribution to you.
## One year, one big bracket
The whole balance lands as ordinary income in a single year. That can push you to the top bracket and cost you ACA subsidies and cheaper Medicare premiums via IRMAA.
## No takebacks, and a clock
The Tax Cuts and Jobs Act killed recharacterization, so a 30% market drop after converting $400,000 still leaves you taxed on the old balance. The SECURE Act also empties the account in 10 years.
## Key takeaway

If a parent's retirement money is in a 401(k), a non-spouse beneficiary can convert it to an inherited Roth. Move it to an IRA first and that right disappears forever.