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Due to death of a parent, I am beneficiary to a defined contribution employer retirement plan of type 403(b). The assets are pre-tax, a dozen or so mutual funds with names like "Stock Index Fund", "Market Index Fund", "Money Index Fund", "2030 Retirement Fund". (At least I think these are mutual funds... I am a total newbie, but trying to learn.)

I have been in touch with the custodian, and can now access the current individual fund values, and talk with a company representative on the phone. My current status with the custodian is "Deferred", so I do not have an inherited IRA, but have a 403(b) plan.

But now I read the article (https://www.fool.com/retirement/plans/inherited-iras/rules/) which claims

if you're a nonspouse... Unless you take the money in a lump sum or disclaim it, you're required to set up an inherited IRA.

Is this true? My parent died about 1 year ago, so the SECURE 2019 legislation applies to me. I am not at all near to 70 years old, so RMDs, I believe, are not required of me. (Required Minimum Distributions.)

The custodian's representative on the phone tells me that I can leave the plan in its current form (called the "deferred" state or employer plan); that I can redeem shares when I want, to make sure that the value is out by the end of ten years.

So am I really required to transform (roll over) the employer-sponsored plan to an "inherited IRA", even though this seems to change nothing important?

There are some differences, and I am curious about any other pros and cons not mentioned below.

  • If I roll-over, the custodian may swap certain funds' shares for ones of a different class. For example, the custodian says they might substitute "Investor"-class shares for existing "Institutional"-class ones. Should I care about this?

  • If I stay in the "deferred" state, it is a more "passive" investment (so said the associate). But I will have a wider array of investment choices in an inherited IRA (not limited to the employer plan's choices).

  • The associate told me that if I stay deferred, then when I ask to redeem shares (take a distribution) that the request will need to be approved by the employer, although they would rarely block it. This does add some seven days of delay, which perhaps is the biggest disadvantage of which I am aware.

To summarize: I want to know if I am free to leave the assets in the deferred form for the ten years, with no IRS punishment/fines/extra taxes. (And if so, what are the pros and cons.)

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4 Answers4

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so RMDs, I believe, are not required of me. (Required Minimum Distributions.)

They are not required not because of your age, but because the law changed. They would have been required under the old rules.

Under the new rules you need to withdraw the full amount within the 10 years after inheriting it. You can time your withdrawal as you want (e.g.: in the year when you get less income, to minimize the tax burden).

As to whether you're required - technically yes. It may depend on the plan's tolerance for how long they'd keep the funds for you, but either way you have to withdraw all of it within 10 years.

The pros and cons - you've listed them. Investment options are usually limited in these plans, the employer may exercise some control, etc. You'd probably be better off rolling the funds over to an inherited IRA under your own control.

littleadv
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A con of leaving it in the plan is that there are just too many cooks in the kitchen. If the employer goes through rounds of mergers, spinoffs, bankruptcy reorganizations, etc., it could take a lot more than 7 days for the custodian to even figure out who is responsible for it and how to contact them. This could become a major problem if you need the money right away, or are up against the withdrawal deadline.

If you do roll it over to an inherited IRA, there is no reason it has to be with the same custodian as the current plan is with.

jjanes
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I am not a lawyer, and I am somewhat surprised the custodian can convert the 403(b) account in situ. In any case, you have to operate under an inherited 401K structure, which means you will have a distribution schedule that exhausts the IRA in max ten years. Uncle Sam wants to have those assets taxed soon, not passed on for multiple generations.

Andrew Lazarus
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It turns out that for a person in my situation, the answer is "No." First the peculiarities of my situation:

  • My parent was still working and making contributions at the time of death (during 2021), and was not required to take any RMDs. (And did not take any distribution, in any case.)

  • death occurred so that the "SECURE Act" changes in the law apply.

If I so chose, I could "Stay in the Plan" and receive RMDs. There is no legal obligation for me to transform the assets into an Inherited IRA, although that is a commonly chosen option, with pros & cons as mentioned above and in comments and other answers.

In my particular situation, if I choose to stay in my parent's (employer-sponsored) plan, my only legal obligation is to liquidate all assets before ten years go by.

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