Deceased spouse 403(b) to IRA

Submitted by Robert Witt on Wed, 2016-09-21 16:52

My clients husband passed away 6 years ago and had a 403(b) contract. We are attempting to rollover the funds but the annuity company (Lincoln Financial) suggests the only option available at this time is lump sum given the amount of time that has expired since his passing. They will manditorily withhold 20% for taxes.

The account is worth approximately $1,000,000. Can I take the net proceeds ($800,000) and add enough funds from other sources (i.e. $200,000) to effect a rollover of the entire balance into an IRA for the spouse?



Submitted by David Mertz on Wed, 2016-09-21 17:54

  • The fact that they consider the distribution to be subject to mandatory 20% withholding indicates that they consider this to be an eligible rollover distribution.  IRC section 401(a)(31)(A) requires that the payer allow the payee to elect a direct rollover of an eligible rollover distribution to avoid mandatory withholding.  Such a distribution could be directly rolled to the surviving spouse’s own IRA or to an inherited IRA for the benefit of the surviving spouse.
  • If an eligible rollover distribution is paid to the surviving spouse and is then indirectly rolled to an IRA by the 60-day deadline, other funds can be substituted for the $200,000 withheld for taxes so as to complete the rollover of the entire distribution.  An indirect rollover can only be made to an IRA owned by the surviving spouse, not to an inherited IRA.

Submitted by Alan - IRA critic on Wed, 2016-09-21 19:26

There could be a 5 year rule problem here, notwithstanding the inconsistency of the mandatory withholding. Did decedent pass PRIOR TO his RBD, and was that in 2010?  If so, the plan could conceivably apply the 5 year rule and not LE, or the plan might require the surviving spouse to make an election to apply LE by the end of the year after the year of participant’s death. If the spouse failed to make a required election and the 5 year rule therefore applied, the entire balance would be an RMD not eligible for rollover. And the 20% withholding could just be an administrative error. I suggest pursuing specific explanation of the plan regarding these issues.

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