Overview

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  If your spouse dies and you inherit his 401(k), you can roll the money into your IRA so it can continue growing tax-deferred, according to USAToday.com. However, if you are a designated beneficiary of the 401(k) but not a spouse, you can roll the funds only into what is called an inherited IRA, following specific IRS rules.
  
  

Inherited IRA Setup

• If you are the beneficiary of a 401(k) but weren't married to the deceased person, you must set up what is called an inherited IRA so you can roll over the 401(k) funds. Be sure the transaction is handled by a financial institution that "understands how to properly title an inherited IRA," USAToday.com warns. Be very sure about this. If you roll the 401(k) proceeds into an ordinary IRA, you will be subject to taxes on the 401(k) money.
  
  

Direct Transfer

• Once you have set up your inherited IRA, contact the trustee of the inherited 401(k) account to start the transfer of the funds. Ask the 401(k) trustee to electronically transfer the funds or write a check to the trustee of your inherited IRA. This method of transferring funds between trustees is referred to as a direct transfer. It ensures the IRS will not levy taxes on the funds to be moved. If the 401(k) trustee instead writes a check directly to you, you will have to pay income taxes on the money.
  
  

Required Minimum Withdrawals

• Non-spouse beneficiaries of 401(k) accounts must take yearly withdrawals of the inherited 401(k) funds. The IRS uses life expectancy tables to determine the amount of these withdrawals. For instance, a 30-year-old who inherits a 401(k) from a parent has more than 50 years to make withdrawals, according to USAToday.com These minimum withdrawal amounts are not taxed and do not trigger a penalty, according to Investopedia.com.