403(b) & 457

What do I do with an inherited 403b?

If you recently inherited a 403(b), you have several options with the retirement assets. Find out what to do with an inherited 403(b).

3 min read

A 403(b) plan is a tax-deferred retirement plan that allows participants to save for retirement through payroll contributions. It is used by government employees, librarians, employees of public schools, medical professionals, etc. to save for retirement. If you inherited a 403(b) account, you have several options with the money.

If you are a spouse of the deceased 403(b) owner, you can decide to keep the account as a beneficiary, rollover to an inherited IRA, rollover 403(b) to your accounts such as IRA, 401(k), Roth IRA, or 403(b), liquidate the 403(b), or disclaim the inherited assets. If you are a non-spouse beneficiary, you can choose to keep the beneficiary account, roll over to an inherited IRA, liquidate, or disclaim the inherited 403(b).

Surviving spouse options with an inherited 403(b)

If you are a spouse of the deceased 403(b) owner, you have the following options with an inherited 403(b):

Keep the beneficiary account

As a surviving spouse of the deceased 403(b) owner, you can decide to retain the beneficiary account with the plan provider. If the spouse was above 72 and was already taking RMDs at the time of death, you must begin taking these distributions by December 31 of the year following the 403(b) owner's death. If the spouse was below 72 at the time of death, you can delay taking RMDs until when they would have turned 72.

Rollover 403(b) to your account

If you inherited a 403(b) plan, you can roll over part or all of the retirement assets to a traditional IRA, 401(k), 457(b), or another 403(b) plan. If you inherited a Roth 403(b), you can only roll over the inherited retirement account to a Roth 401(k), Roth IRA, or another Roth 403(b).

Once you roll over the inherited 403(b), you must wait until you reach age 59 ½ to take penalty-free distributions from the account. Also, you can postpone taking mandatory distributions until when you reach RMD age.

Rollover to an inherited IRA

If you inherit a 403(b) plan from your spouse, you can open an inherited IRA with a different custodian and transfer the inherited assets. In this case, your RMDs will be based on your age and determined based on the Single Life Table. When you transfer the inherited assets to an inherited IRA, withdrawals will not be subject to the 10% early withdrawal penalty.

Cash out the inherited 403(b)

If you need money immediately, you can choose to liquidate the inherited 403(b) and take the full distribution. The withdrawal will be added to your taxable income for the year. If the withdrawal occurs in a year of high income, it could push your income to a higher tax bracket and pay higher taxes. Also, the distribution may be subject to a 20% federal income tax withholding.

Disclaim the inherited 403(b)

If you do not need the inherited assets, you can choose to disclaim part of or all of the inherited 403(b) assets. Once you disclaim the assets, they will be passed to other named beneficiaries of the original 403(b) owner. For example, if you are the primary beneficiary, and the children are named as contingent beneficiaries, you can disclaim your interest in the inherited 403(b) so that the retirement assets pass to the children

Non-spouse beneficiary options with the inherited 403(b)

If you inherited a 403(b) from anyone other than your spouse, you have the following options with the money:

Keep the beneficiary account

You can decide to keep the inherited 403(b) with the plan provider and take distributions from the account. If the 403(b) owner died on or after January 1, 2020, you must deplete the 403(b) account by the 10th anniversary of the 403(b) owner’s death. You can make withdrawals from the account at any time and in any amount during the 10 years. However, if the original 403(b) owner died before January 1, 2020, you will be required to liquidate the account within 5 years of the 403(b) owner’s death.

Rollover inherited 403(b) to an inherited IRA

Most plans allow non-spouse beneficiaries to transfer inherited 403(b) assets to an inherited IRA. You can open an inherited IRA with a different custodian and request a direct transfer to the new account. You can leave the money in the inherited IRA to grow tax-deferred, and take RMDs based on your life expectancy.

While non-spouse beneficiaries may be allowed to transfer retirement assets to an inherited IRA, they are not allowed to roll over the inherited 403(b) into their own IRA, 401(k), Roth IRA, or other workplace retirement account.

Cashout the inherited 403(b)

If you do not want to keep the beneficiary account or transfer the 403(b) to another retirement account, you can choose to liquidate the 403(b) and take the full distribution. However, you will be required to pay ordinary income taxes on the distribution you take.

Disclaim the assets

If the original 403(b) owner named you as one of the beneficiaries of the 403(b) account, you can choose to disclaim all or part of your inherited assets so that your interest goes to the remaining beneficiaries. Once you disclaim the inherited 403(b), you cannot recede the decision.

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