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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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  • Are there any other beneficiaries on the account?
    – stannius
    Commented Oct 13, 2022 at 11:44
  • Yes, there are other beneficiaries. @stannius
    – 311411
    Commented Oct 14, 2022 at 14:08
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    “Multiple Beneficiaries If there are multiple beneficiaries, the IRA can be split into separate accounts for each one (a good move if one beneficiary is a non-spouse, subject to the 10-year rule, and the other is a spouse or in one of the other special categories). If you want to split the IRA, you must do so by Dec. 31 the year following the year of the original owner's death.” You don’t strictly “have to” if you're all subject to or willing to abide by the 10 year rule, but unless we want to all use the same distribution schedule, it would make sense to split it proactively.
    – stannius
    Commented Oct 14, 2022 at 22:02
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    The fees charged on investor class shares vs. institutional class shares are probably different. For TIAA-CREF these fees depend on the size of the employer and range from good (for large universities) to awful (for small colleges with relatively little money in the plan.) Commented Oct 16, 2022 at 0:25

4 Answers 4

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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.

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  • To clarify: you mean required by the IRS to rollover to inherited IRA, and "technically" because IRS might not especially care to pursue such a violation? Also to clarify: required by December 31 of the year after the year of decease? thanks for your swift reply.
    – 311411
    Commented Oct 10, 2022 at 20:55
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    @311411 you may be required by the original plan to roll over the funds. If it's an IRA - then by the end of the year, if it's an employer-sponsored plan - then whenever they want you out. Once you roll over - you roll over into the inherited IRA (vs. regular IRA that you'd own for yourself).
    – littleadv
    Commented Oct 10, 2022 at 20:57
  • It is an employer-sponsored plan in this case. I see, I didn't think much about what the plan operators prefer, since they never contacted me.
    – 311411
    Commented Oct 10, 2022 at 21:02
  • My misunderstanding about the bit from the fool.com article was that it was a legal requirement to set up the inherited IRA. Now I see that it comes from the Plan's sponsor, the deceased's former employer.
    – 311411
    Commented Oct 10, 2022 at 21:22
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    @311411 The legal requirement is to set up inherited IRA, this to contrast a regular IRA that you might have already. It should be a separate and sequestered account. Generally, the plan would ask you to remove the funds quickly since once the person is deceased all the assets in the estate must eventually be distributed for the estate to close.
    – littleadv
    Commented Oct 10, 2022 at 21:34
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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.

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  • As of now, I am leaning towards rolling over to an IRA under my control. Thanks for this additional point of view. (+1) Also, what you say is true about setting up the IRA with a different custodian. The forms I have make it easy to do so.
    – 311411
    Commented Oct 11, 2022 at 16:54
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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.

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    When I first contacted the custodian, I tried to get some information about the nature of the assets. But for security reasons, they would tell me very little, and steered me to the "Defer" option. For this I had to send in a notarized form with personal info, address etc. My guess is, the custodian has nothing to lose if I screw things up for myself with Uncle Sam. But they might prefer I not take my money away from their firm entirely, which I could do. But the person on the phone made it clear that the firm doesn't mind the current situation one bit.
    – 311411
    Commented Oct 14, 2022 at 14:06
  • The firm isn't going to be the one in trouble with the IRS for not pulling out the required distribution (and paying tax on it). You even have to pull money out for the year of the death, unless the owner did it before dying. Any major brokerage (Fidelity, Schwab, you name it) will be delighted to help you, including helping to schedule the required distribution. Commented Oct 14, 2022 at 21:11
  • "even ... for the year of death": I did not do this, and am confused on this point. I understood I needed to take action "by December 31 of the year after the year of decease", which I have done. So now I cannot take money out for 2021 (last year). Can you explain the apparent contradiction? @Andrew Lazarus
    – 311411
    Commented Oct 28, 2022 at 20:41
  • The issue is whether the decedent already took the RMD for the year of death. If so, you do not have to. If not, for the year of death I believe the required amount is based on his or her age; the special rules for inherited IRAs don't apply until the year after. You should check this with whatever major brokerage you are using. Commented Oct 29, 2022 at 2:27
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    Depends on age. If under 70.5 (I think this number is now 72) the RMD was zero. It's on age, not work status. I don't believe you have to make any sort of RMD if it would have been zero had the decedent lived the full year. (The broker should know.) Commented Oct 29, 2022 at 2:35
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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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