Inherited 403(b) Rules: What Spouses, Children and Other Heirs Must Do

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

Inherited 403(b) rules depend on who the beneficiary is. A surviving spouse can roll the account into their own IRA and wait until their own required minimum distribution (RMD) age. Most other heirs, including adult children, must empty the account by December 31 of the 10th year after the year of death, and if the owner had already reached their required beginning date, they must also take a minimum withdrawal in each of years 1 through 9.

A minor child of the owner is the main exception: small annual withdrawals until age 21, then 10 more years to empty it. This page covers both sides of the question for a high-income family in California or Washington: what you must do when you inherit a parent’s 403(b), and what happens to your own 403(b) if you die while your kids are young.

Who the beneficiary is decides the timeline

The SECURE Act changed the rules for owners who died after December 31, 2019. Under the final regulations, beneficiaries fall into three groups: eligible designated beneficiaries (a surviving spouse, the owner’s minor child, a disabled or chronically ill person, or someone not more than 10 years younger than the owner), other named individuals, and non-individuals such as an estate (Treas. Reg. §1.401(a)(9)-4(e); see also IRS, Retirement Topics: Beneficiary).

The age-21 cutoff comes from the final RMD regulations, which say a person “reaches the age of majority on the individual’s 21st birthday” (Treas. Reg. §1.401(a)(9)-4(e)(3)). It applies only to the owner’s own child. A grandchild or niece who is 6 years old gets the plain 10-year rule.

The annual withdrawal trap in the 10-year rule

Many heirs read “10 years” as “take nothing until year 10.” That is only true if the owner died before their required beginning date. If your parent had already started RMDs, you must take an annual RMD starting the year after death, and still empty the account by year 10 (IRS Notice 2024-35).

The IRS waived the penalty for missed annual amounts in 2021 through 2024 while the rules were being finalized. That relief is over. The final regulations apply to distribution years beginning on or after January 1, 2025 (Federal Register, July 19, 2024). If your parent had not taken their own RMD for the year they died, you generally need to take it by December 31 of that year.

A 403(b) held entirely in a Roth account is different. The owner is treated as dying before the required beginning date, so there are no annual RMDs for a non-spouse heir, only the year-10 deadline (Treas. Reg. §1.401(a)(9)-3(a)(2)). If the account mixes pre-tax and Roth money, that rule does not apply. If the Roth account has met the 5-taxable-year period, withdrawals are tax-free (IRC §402A(d)), so leaving it invested until late in the 10-year window can mean more tax-free growth.

How inherited 403(b) money is taxed in California and Washington

Pre-tax 403(b) withdrawals are ordinary income to the heir in the year they are taken. Three details matter for a high-income household:

• No 10% early withdrawal penalty. Distributions made because of the owner’s death are exempt, whatever the heir’s age (IRC §72(t)(2)(A)(ii)).
• No 3.8% Net Investment Income Tax. Distributions from 403(b) plans and IRAs are excluded from net investment income (IRC §1411(c)(5)).
• Full state tax in California, none in Washington for now. California taxes the withdrawals at ordinary rates. Washington has no individual income tax in 2026, but it has enacted a 9.9% tax on AGI over $1,000,000 starting January 1, 2028, with details still pending state guidance (WA Department of Revenue).

The table shows the approximate combined marginal rate on each inherited dollar for a married couple filing jointly. Federal rates are 2026; California uses the 2025 schedules because 2026 schedules are not yet published.

The federal 37% bracket starts at $768,700 of taxable income for 2026 (Rev. Proc. 2025-32). California’s 11.3% bracket runs from $891,542 to $1,485,906 for joint filers in 2025, and the 1% Behavioral Health Services Tax applies to taxable income over $1,000,000 (FTB 2025 rate schedules).

Worked example: a $600,000 403(b) from a retired teacher

Assumptions: Priya and Dan live in the Bay Area with two kids, ages 5 and 9. Their household income is about $950,000 in wages and RSUs, and taxable income is about $900,000 for both federal and California purposes. Priya’s mother, a retired teacher, died at 78 and named Priya as sole beneficiary of a $600,000 403(b). For simplicity, we ignore investment growth and assume their income stays flat. We did not model AMT.

Option A: take it all this year. Every dollar is taxed at 37% federally, so federal tax is $222,000. California tax on the extra $600,000 is about $72,941: 11.3% up to $1,485,906, 12.3% on the last $14,094, and 1% on the $500,000 above $1,000,000. Total: about $294,941.

Option B: about $60,000 a year for 10 years. Federal tax is still 37%, or $222,000 in total. California tax is 11.3% on each $60,000, or $6,780 a year and $67,800 over 10 years, because their income never crosses $1,000,000. Total: about $289,800.

The difference is only about $5,141. For a household already in the top federal bracket, spreading the withdrawals evenly saves far less than most people expect. The real levers are different:

• Tax-deferred growth. Money left in the inherited account keeps compounding untaxed for up to 10 years.
• Lower-income years. If Dan takes a year off, or one of them leaves a hospital job to start a practice, a $100,000 withdrawal that year could be taxed at about 33.3% instead of 48.3%, roughly $15,000 less.
• Where you live when you withdraw. A Washington heir with AGI near $1,000,000 pays no state tax on withdrawals in 2026 and 2027, which may favor taking more before the new tax starts in 2028.

Because Priya’s mother had passed her required beginning date, Priya must take at least the annual RMD in years 1 through 9 even under Option B. The plan or IRA custodian can calculate it.

Step-by-step: what to do when you inherit a 403(b)

1. Get a copy of the death certificate and call the plan. Ask for the beneficiary claim form and confirm you are the named beneficiary.
2. Check whether the owner took this year’s RMD. If not, and they had reached their required beginning date, arrange to take it by December 31.
3. Ask what payout options the plan allows. Some plans offer fewer choices than the law allows, such as a lump sum only.
4. Move it by direct transfer, not by check. A non-spouse heir can roll the money only through a direct trustee-to-trustee transfer into an inherited IRA titled in the deceased owner’s name for your benefit (IRC §402(c)(11), applied to 403(b) plans by IRC §403(b)(8)(B)). A check made out to you is a taxable distribution and cannot be put back.
5. Map out 10 years of withdrawals against your own income. Plan around RSU vesting schedules, expected bonuses, a sabbatical, or a planned move.
6. Adjust your withholding or estimated payments. Withdrawals add to income that your paycheck withholding does not cover.
7. Name your own beneficiaries on the inherited IRA. If you die before year 10, your heirs inherit the remaining balance on the original deadline.

How it shows up on your tax return. The plan or IRA custodian issues Form 1099-R. Box 7 shows code 4 (death) for distributions paid to you, and codes 4 and G for a direct rollover to an inherited IRA, which is not taxable (IRS Instructions for Forms 1099-R and 5498).

What happens to your own 403(b) if you die with young children

Many physicians, researchers and hospital leaders in California and Washington hold large 403(b) balances from nonprofit hospitals and universities. If that describes you, a few decisions carry more weight than the investments in the account.

The beneficiary form overrides your will

The plan pays whoever is named on the plan’s beneficiary form, whatever your will or trust says. A form last updated before marriage, before your children were born, or before a divorce can send the money to the wrong person. Review it after every major life event and every time you change jobs.

Your spouse may have a legal right to the account

If your 403(b) is covered by ERISA (most private nonprofit employers with employer contributions), your spouse is generally the default beneficiary. Naming anyone else, including a trust for the kids, usually requires your spouse’s written consent, witnessed by a notary or plan representative (IRC §417(a)(2)). Public university and church plans may follow different rules, so ask the plan.

Naming minor children directly causes problems

A plan will not hand money to a 7-year-old. If you name a minor directly, a court may need to appoint someone to manage the money, and the child may get full control at 18 or 21. Many families with young children name the surviving spouse first and a trust for the children as the contingent beneficiary. The trust must be drafted to work with the RMD rules, which is a job for an estate attorney who handles retirement accounts.

Estate tax: a federal non-issue for most, not in Washington

For 2026, the federal estate and gift tax exclusion is $15,000,000 per person (IRS). Washington’s estate tax exclusion is $3,076,000 for deaths from January 1 to June 30, 2026, and $3,000,000 for deaths from July 1 to December 31, 2026 (WA DOR). A Seattle family with a house, a 403(b), vested RSUs and life insurance they own themselves can pass $3,000,000 quickly, and the 403(b) counts toward that total. California does not currently impose its own estate tax; no California estate tax return is required for deaths after 2004 (California State Controller).

Common mistakes we see

• Assuming “10 years” means no withdrawals until year 10 when the owner had already started RMDs.
• Taking a check instead of a direct transfer, which can make the whole balance taxable in one year.
• Leaving an ex-spouse or “my estate” on the form.
• Naming minor children directly instead of through a trust.
• Emptying a Roth 403(b) early when it could have grown tax-free for up to 10 years.
• Assuming Washington will never tax these withdrawals, when a 9.9% tax on AGI over $1,000,000 starts in 2028 (how it treats retirement withdrawals is still pending state guidance).

What to document for your kids

If both parents die while the kids are young, a trustee (or, without a trust, a court-appointed guardian or custodian) manages the money. Once your children turn 21, a child beneficiary has 10 years to empty the account, so the whole balance must be paid out by about age 31, often to a young adult with full control of a large, taxable sum. The beneficiary form decides where the money goes. It says nothing about what you hoped it would be used for.

A one-page note, filed with your estate documents, can fill that gap: which accounts exist, who is named on each, why you set up the trust the way you did, and what you would want a 25-year-old to weigh before withdrawing. As Kevin Luu puts it: “Your kids will inherit your money. Will they inherit your judgment?”

Frequently asked questions

Do I pay tax on an inherited 403(b)?

Yes, on pre-tax money. Each withdrawal is ordinary income in the year you take it, taxed at your federal bracket and, in California, your state bracket. There is no 10% early withdrawal penalty and no 3.8% Net Investment Income Tax on these distributions. Qualified withdrawals from an inherited Roth 403(b) are tax-free. Washington residents owe no state income tax on withdrawals in 2026 and 2027.

Can a surviving spouse keep the 403(b) as an inherited account instead of rolling it over?

Yes. A spouse can roll the account into their own IRA or keep it as an inherited account. Keeping it inherited can make sense for a spouse under 59½ who may need the money, because withdrawals from an inherited account avoid the 10% penalty, while withdrawals from their own IRA generally would not. Many spouses keep it inherited at first and roll it over later.

What if I miss an annual RMD on an inherited 403(b)?

The excise tax on a missed RMD is 25% of the shortfall, reduced to 10% if you correct it within the correction window (SECURE 2.0 §302, described in Notice 2024-35). The IRS can also waive it if the shortfall was due to reasonable error and you are taking reasonable steps to fix it (IRC §4974(d)). Take the missed amount as soon as you notice, then file Form 5329 with a statement of explanation (Form 5329 instructions).

Next step

Pull the beneficiary forms for every 403(b), 401(k) and IRA in your household this week, and check the primary and contingent names against your current estate plan. For how these accounts fit with your other savings, see contributing to a 403(b) and a Roth IRA and the 403(b) rule of 55. Our retirement and employee benefits, estate planning and tax management pages explain how the Age Five Family Office™ handles this work for families. If you want a second look at your own numbers, the Tax & Wealth Assessment is the place to start.

This is general education, and the right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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