When you leave your 401(k) to a designated beneficiary, the money that beneficiary withdraws from your plan is counted as his or her income, and your beneficiary will be liable for income taxes on any withdrawals he or she takes.
While you’re alive, you have the option of taking money out of your plan, or leaving it in the plan and allowing it to grow, at least until you reach age 70 ½. After this point, the IRS requires that you take at least a baseline amount, called a Required Minimum Distribution (RMD), on an annual basis. The amount of your RMD depends on your age at the time the distribution is taken, as well as the amount of money in your 401(k).
When you pass away and a designated beneficiary inherits your 401(k), your beneficiary’s relationship to you determines whether or not withdrawals will be required to start right away. If your beneficiary is your spouse, he or she is allowed to roll your 401(k) into his or her retirement plan. In this situation, the rules that govern your spouse’s retirement plan take effect, and depending on the type of account and your spouse’s age, he or she might not have to take RMD’s, at least not right away.
On the other hand, if a beneficiary other than a spouse inherits your 401(k), then he or she will be required to start taking RMD’s in the year after your death. Your beneficiary’s RMD will be calculated based on your 401(k) balance and your beneficiary’s age, and he or she will have the option of withdrawing more than the RMD at any given time. Your beneficiary will owe income tax on any amount withdrawn from your plan in the year that money is withdrawn.