(b)lines Ask the Experts – Direct Rollovers for 403(b) Plans Funded by 403(b)(7) Custodial Accounts

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

This is an interesting question, since there is technically no such thing as a “custodial account 403(b) plan” per se, but this terminology has indeed been a source of confusion over the years.

For the first several decades of the existence of the 403(b) plan, the only permissible investments were annuities. Once 403(b)(7) custodial accounts became popular in the 80s and 90s (they were formerly added to the Code as a permissible investment in 1974, but it took several years for mutual funds to penetrate the 403(b) market), they were initially referred to as “403(b)(7) plans” to distinguish them from plans that invested in 403(b)(1) annuities. However, the term actually refers to the funding vehicle for a 403(b) plan, not to the plan itself, and today, plans often utilize both 403(b)(7) custodial accounts (more commonly referred to as “mutual funds”) as well as 403(b)(1) annuities.

Thus, given this history, the Experts assume the question is actually “Is a 403(b) plan that is invested in 403(b) custodial accounts an “eligible retirement plan” for purposes of the direct rollover rules?” And the answer to this question is yes—one can indeed complete a direct rollover to or from a 403(b) plan funded through a 403(b)(7) custodial account. It doesn’t matter if the plan in question is the distributing or receiving plan.

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.