Inherited 403(b) with pre-1987 money
I inherited a 403(b) in 2004 and only recently discovered that 53% of the money in it is pre-87 contributions. I have been taking distributions from 100% of it based on my LE, as required by law, since 2004. (My mother was taking distributions from it when she died.) What, exactly, is the implication of the pre-87 money? When the account was transferred to another institution, the money was blended, but I have records of the exact amounts of the pre-87 funds as of the day I inherited them. The former institution did not inform me, or the new institution of the pre-87 money. I discovered it by accident.
Is pre-87 money non-taxable? Or am I not required to take distributions from it until I turn 75? I was a non-spousal beneficiary and am 47. Since I have taken distributions from it since 2004, should I go back and amend my tax returns from 2005, 2006 and 2007? I have asked accountants and attorneys and no one seems to know the answer to these questions. If anyone can produce the exact ruling or tax code from the IRS, I would greatly appreciate it. And if anyone can explain it in plain English, I would be forever grateful! Thank you!
Permalink Submitted by Alan Spross on Mon, 2009-04-13 21:47
The pre 1987 accrual balance only had the benefit of a delayed RMD requirement for your Mother until she reached age 75. These accruals are fully taxable, so the benefit was limited to a reduced RMD requirement only. Once the account was transferred to another custodian who did not accurately track the pre 87 amount, those accruals are considered to be post 86 balances only.
But for a beneficiary, even a spouse, these balances no longer apply, and the beneficiary must take RMDs based on IRA rules under Sec 401a(9)b. This is apparently what you have been doing since 2005, and should simply continue to do so. The reason you have had problems getting a firm indication on this lies with the fact that the IRS has not issued concise advise on the matter, since RMD requirements prior to 1987 were essentially unregulated. The regulations that did exist were only concerned that the employee took enough distributions during their later years such that the plan assets were used primarily for them and not to save for their beneficiaries. There is no reason that a beneficiary would ever receive delayed RMD requirements and there are none for non spouse beneficiaries in the 2002 RMD requirements.
The good news is that you did not miss out on anything here. Perhaps your Mother was able to utilize her delayed RMDs on these amounts between her retirement or age 70.5 and age 75. If so, you inherited a larger amount than otherwise. Below is the section of the IRS Regs that come closest to addressing this issue, but fail to directly state what you are looking for:
http://www.taxalmanac.org/index.php/Treasury_Regulations%2C_Subchapter_A…
Permalink Submitted by Kimber Patterson on Mon, 2009-04-13 22:00
Alan, I can’t thank you enough for your thorough response and answer to my questions. You have saved me some sleepless nights. Thank you so very much.