Can Beneficiaries Elect Timing of Payments From Inherited 403(b) Assets?

“In a 403(b) plan, does a spouse beneficiary have the ability to forgo the payments over his/her life expectancy and opt for the payout under the 10-year rule established by the SECURE Act for designated non-spouse beneficiaries? Would it matter if the participant’s death was before or after their required beginning date? Would other eligible designated beneficiaries who satisfy the exception to the 10-year rule have the ability to choose the 10-year option rather than the life expectancy option?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

This is a good question, as it brings to light the change made under the Setting Every Community Up for Retirement Enhancement (SECURE) Act that made distribution options for many non-spouse beneficiaries less flexible. Prior to the passage of the SECURE Act, a non-spouse beneficiary who was a person (as opposed to say, certain trusts) could generally distribute the assets over the life expectancy of the beneficiary (or oldest beneficiary). However, following the SECURE Act, all assets must be distributed within 10 years of the participant’s death for non-spouse beneficiaries who do not qualify as eligible designated beneficiaries.

For a spouse, distribution options are far more flexible, including rolling over assets to the spouse’s own individual retirement account (IRA) and taking required minimum distributions (RMDs) based on the surviving spouse’s age, leaving the funds in the account and commencing RMDs when the deceased participant would have reached age 72 had he/she lived (if the participant was already due an RMD at the time of death, the spouse could just continue those RMDs), or rolling over the assets to an inherited IRA and taking RMDs based on when the deceased participant would have turned age 72, in accordance with plan terms.

However, just because a spouse can delay distributions in this fashion does not mean he/she is REQUIRED to do so. He/she can certainly take the account balance as a lump sum, withdraw funds as needed, or even opt for the 10-year outside limit that is now required for non-spouse beneficiaries under the SECURE Act, in accordance with payment forms available under the plan. And no, it would not matter in this scenario if the participant’s death was before or after his/her required beginning date for RMDs. As always, the surviving spouse would be responsible for income taxes on the distribution(s) made to the spouse.

To answer your final question, other beneficiaries besides spouses who satisfy the exception to the 10-year rule (e.g., “eligible designated beneficiaries”), such as a child who has not reached the age of majority, a disabled or chronically ill person or a person not more than ten years younger than the employee, could also elect a 10-year payout option, even though they are not required to do so. Of course, the plan must so permit. Some plans may choose to limit longer distributions for all non-spouse beneficiaries.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.