Ask an Advisor: Will the $500k in My Retirement Account Be Taxed When My Heirs Inherit it?

Brandon Renfro, CFP®, RICP, EA

Mon, Mar 10, 2025, 5:00 AM 5 min read

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I person astir $500,000 successful a 403(b) account. I americium penning my volition and I bash not cognize whether the wealth successful my 403(b) volition beryllium taxable to taxes erstwhile it is distributed to those I database successful my will. Or, volition the wealth conscionable walk straight to those whom I person named?

– Bill

Bill, it's large that you're reasoning astir this successful advance. While your heirs whitethorn look taxation consequences, your 403(b) equilibrium won't automatically beryllium taxed successful afloat erstwhile they person it. Instead, the taxation implications beryllium connected however and erstwhile they retreat the funds. Fortunately, with cautious planning, you tin assistance negociate their imaginable taxation burden. Let's interruption down however your 403(b) assets volition walk to your heirs and what they should expect successful presumption of taxation.

If you’re facing questions astir however to negociate your wealthiness oregon program your estate, see speaking with a fiscal advisor.

Because we are talking astir your status relationship and your will, there's an important favoritism to support successful mind: While your volition determines however astir of your assets are distributed aft your death, your 403(b) relationship allows you to sanction beneficiaries directly.

This is an highly important favoritism for a mates of reasons:

Even if your volition and your 403(b) beneficiary designations conflict, the beneficiaries listed connected your relationship volition person the funds. For example, if your volition states that your 403(b) should spell to your children, but your relationship inactive lists an ex-spouse arsenic the beneficiary, your ex-spouse volition inherit the funds. Be definite your beneficiary designations align with your wishes.

If you don't designate beneficiaries, your 403(b) volition beryllium distributed according to your will, which often means going done probate. Probate is simply a ineligible process that tin beryllium time-consuming and public. By naming beneficiaries connected your 403(b), you tin assistance your heirs debar probate and person the funds much quickly.

(But if you person further questions astir fiscal readying and/or property planning, lucifer with a fiscal advisor and speech it over.)

As I mentioned, determination are taxation consequences your heirs request to recognize but they aren't straight related to receiving the funds. Your heirs lone incur a taxation work erstwhile they retreat the money. Think of it arsenic a two-step process.

• Step 1: Your heirs volition person their stock from the 403(b). They tin take to permission the wealth successful the relationship oregon transportation it to an inherited IRA. If they bash either of these, they won't beryllium immoderate taxes immediately. If they take to person the wealth outright – specified arsenic by depositing it into their savings relationship – past it's afloat taxable.

• Step 2: If they support the wealth successful the 403(b) oregon transportation it to an inherited IRA, they volition lone beryllium taxes connected wealth they withdraw, successful the twelvemonth they retreat it.