403(b) Inheritance Rules: Spousal and Non-Spousal Beneficiaries

There are two major certainties in life, death, and taxes. As much as you want to avoid them you won’t be able to escape them. For many individuals who have a retirement plan, chances are that you may not get to spend all the money in your retirement account before you pass away. If you have a 403(b) retirement account there are important 403(b) inheritance rules you should be aware of especially as you head into your later years.

It’s equally important for future beneficiaries of your estate to know what you plan on leaving them when you pass away. In this post, we will take a look at 403(b) inheritance rules and what your options are as a beneficiary.


  • The 403(b) inheritance rules state the rights and rules that beneficiaries must follow when they have inherited an account
  • Beneficiaries will have different inheritance options depending on their circumstances as well as how the estate is set up
  • The rules for spousal beneficiaries and non-spousal beneficiaries are different

The Major 403(b) Inheritance Rules

The advantage of a 403(b) retirement plan is that it has a ton of flexibility for inheritance. The plan provides financial options for beneficiaries that allow them to make the most of their inheritance funds. Beneficiaries will however have different options depending on their circumstances.

Below are some of the different 403(b) inheritance rules. It’s worth noting that some of these will depend on whether or not the 403(b) permits them. As such, it’s important to check 403(b) plan rules and the designated beneficiaries.

Inherited 403(b) 10-year Rule 

403(b) inheritance rules

This is one of the most common 403(b) inheritance rules. When a 403(b) account holder dies before the funds in the plan are depleted, there are specific rules that apply to beneficiaries.

  • Beneficiaries must withdraw the entire 403(b) account balance by the end of the 10th year following the year in which the account holder died
  • There are no required minimum distributions under the 10-year rule
  • The withdrawals from a 403(b) plan are taxed as regular income
  • The 10-year Rule can be extended longer under qualifying exceptions 

For example, on January 31st, 2020 inherited 403(b) assets must be fully withdrawn by January 2030. Failure to withdraw the full amount by the 10th year will result in a penalty tax of 50%.

Inherited 403(b) Plan Exemptions – Eligible Designated Beneficiaries 

The 10-year rule has 5 major exceptions depending on the beneficiary type. These include:

  • A surviving spouse
  • Minor children (until 18 years of age )
  • Disabled individuals
  • Chronically ill individuals
  • An individual not more than 10 years younger than the deceased account holder

Under these conditions, the 10-year rule does not apply. The beneficiaries don’t have to empty the 403(b) account, but they still have to take RMDs. These beneficiaries are referred to as “eligible designated beneficiaries”. They can take distributions according to the “stretch rules” based on their estimated life expectancy.

Important Note: A former spouse can remain the primary beneficiary even if a divorce has taken place. Primary beneficiaries are not automatically revoked by divorce. As such it’s important to review your beneficiaries whenever there is a qualifying life event.

403(b) Spouse Beneficiary Options – Rollovers and Withdrawals

Spousal 403(b) beneficiaries can roll all or part of the proceeds from a pre-tax 403(b) if the plan allows it. There are certain plans that may have their own limitations. However, most plans permit rollovers without any issues.

Below are the different rollover options available for spousal beneficiaries:

  • Roll the funds over into your own retirement account. Spousal beneficiaries can roll the inherited 403(b) into a traditional IRA, 401(k), 457(b), 401(a), or a different 403(b) account. 
  • Keep the funds in the 403(b) account. The spouse can keep the funds in the current 403(b) plan.
  • Roll the funds into an inherited IRA. If the spouse also inherited an IRA account, they have the option of rolling the funds into the IRA.
  • Withdraw all the funds. The spouse also has the option of withdrawing all funds from the account. However, they will be have to pay the necessary income taxes.
  • Disclaim interest in the account. This is an uncommon option, however, a spouse can choose to disclaim their interest in the inheritance and pass it on to other beneficiaries. This is done if the beneficiary deems the inheritance a better financial fit for a secondary beneficiary.

If you’re a beneficiary of a 403(b) plan, it’s worthwhile to review your options in order to make the most use of your inheritance. We advise reviewing your options with a licensed financial advisor.

Inherited 403(b) Non-Spouse Beneficiary – Rollovers and Withdrawals 

The rules for non-spouse beneficiaries aren’t as flexible as they are for spousal beneficiaries. They are very much the same with a few unique exceptions when it comes to 403(b) rollovers.

  • Non-spousal beneficiaries of an inherited 403(b) plan may only make a direct rollover/transfer.
  • An indirect rollover is not an available option.
  • Indirect rollovers can only be rolled over to an “inherited IRA”.
  • Non-spousal beneficiaries can’t roll over the inherited 403(b) account to an IRA or retirement account at their work.
  • Non-spousal beneficiaries are subject to the 10-year distribution rule. This means all funds in the 403(b) plan must be withdrawn following the 10th year following the account holder’s death. 

Do Beneficiaries Pay Tax On 403(b) Inheritance?

Funds inherited from a 403(b) plan are taxable when the beneficiaries begin to take distributions from the account. However, the funds are not taxable if they are distributed from an inherited Roth IRA.

For people who want to make the most out of their 403(b) inheritance, it’s best that you consult with a financial advisor who can help you roll over your funds into an inherited IRA. This will help you avoid taxes when taking distributions.


As a beneficiary, you have some unique options when it comes to what you can do with an inherited 403(b) plan. It’s important to know your rights and options because they can help you avoid unintended tax consequences as well as help you to maximize your inheritance.