Such heirs can take payouts over their lifetime once the funds are rolled into an IRA, IRS says, as long as the plan permits rollovers.
Previous IRS guidance implied that distributions from the heir's new IRA would have to follow the rules of the decedent's 401(k) plan. Many plans require that heirs must clean out the accounts in five years or less
But nonspousal heirs face a deadline. To beat the five-year rule, the 401(k) funds must be transferred to an IRA no later than the year after the year the 401(k) owner died. So if the owner died in 2006, the IRA transfer must be done by the end of 2007 to get lifetime payouts. Otherwise, the heiir is required to quickly clean out the account