Inheriting a 403(b) Plan: What to Do & How It Works

When a person inherits a 403(b) plan from someone else, it entails a number of 403(b) inheritance rules and beneficiary options, among other factors.

What Is an Inherited 403(b) plan?

When the original account holder of a 403(b) plan dies, the account holder’s designated beneficiary inherits the 403(b) plan and its assets. For example, someone with a 403(b) plan may have named their spouse as the beneficiary. When that account holder passes away, the spouse inherits the 403(b) plan.

403(b) Beneficiary Designation

Someone with a 403(b) plan can designate anyone as a beneficiary. However, 403(b) beneficiary rules require a married person to designate their spouse to receive at least 50% of the plan’s vested balance, unless the spouse has signed a waiver relinquishing their portion of the funds. The waiver must be signed and submitted to the plan sponsor for the account holder to designate the funds differently.

Outside of those rules, there is no limit to the number of beneficiaries a person can list on their account.

403(b) Beneficiary Options

A spouse who is named beneficiary of the 403(b) plan may receive the plan’s funds in a variety of ways: They may maintain the plan and make regular withdrawals, move the assets to their own 403(b) or another retirement plan in their own name, roll over the assets into their own IRA, or they could take a lump-sum withdrawal. Rules governing the different options can be complex, so we recommend that the inheriting spouse consult a tax professional.

Non-spouse beneficiaries of a 403(b) plan have the option of moving the assets to an inherited 403(b), roll over to an inherited IRA or take a lump-sum withdrawal.

403(b) Inheritance Rules

Provisions in the SECURE Act, which governs inherited retirement assets, affect beneficiary distributions if the account owner died on or after January 1, 2020. For a comprehensive review of pre-SECURE Act and post-SECURE Act provisions, please see this IRS fact sheet.

The distribution options depend on the type of beneficiary involved, as defined by the IRS, which identified three categories of beneficiary:

An “eligible designated beneficiary” is the account owner’s spouse, the account owner’s minor child under age 18, someone who is disabled or chronically ill, or a person who is younger than the original account holder by 10 years or less.

An “eligible designated beneficiary” has the following options:

• Account owner’s spouse may treat the account as their own, taking distributions using a single life expectancy calculation, or take a lump sum.
• All other “eligible designated beneficiaries” must distribute using a single life expectancy calculation or take a lump sum.

A “designated beneficiary” is anyone who doesn’t qualify as an eligible designated beneficiary. This type of beneficiary has the following option:

• Must withdraw the entire account balance by December 31 of the year that marks the 10th anniversary of the account owner’s death.

A “nonperson beneficiary” is an estate, trust or charitable organization. This type of beneficiary has the following options:

• Account owner dies before the required beginning date, (April 1 in the year after the account owner had separated from service or would have turned 73*). In that case, the account must be depleted by December 31 of the year that includes the 5th anniversary of the account owner’s death.
• Account owner dies on or after required beginning date then the entity may use a life expectancy calculation based on the remaining life expectancy of the decedent.

As ever, the funds will be taxed as income in whichever years they are taken.

Questions? Contact Us

If you have any questions about inherited MissionSquare 403(b) retirement plans, Contact us.

* Age 70½ (if you were born before July 1, 1949), age 72 (if you were born after June 30, 1949, and before January 1, 1951), or age 73 (if you were born after December 31, 1950).