Q. I am not sure I understand the difference between 403(b)(1) annuities and 403(b)(7) custodial accounts regarding withdrawal restrictions. I am told that some grandfathering applies to annuities, and that regarding annuities there are differences in restrictions on on-elective (employer) contributions. Please explain!
A. The rules differ in this respect — for 403(b)(1) annuities issued after Jan. 1, 2010, the restrictions on employer contributions are subject to the written plan language, which can apply restrictions based upon:
- a stated age;
- a stated event; or
- period of time in the plan.
Those could differ from pre-59½ rules that apply to elective deferrals to annuities. If the annuity was issued before Jan. 1, 2009, there are no federal Tax Code restrictions. For 403(b)(7) accounts, all values are restricted pre-59½. Additionally, because withdrawal restrictions did not apply to 403(b)(1) annuities until Jan. 1, 1989, the account value before that is grandfathered — that is, no withdrawal restrictions apply to the Dec. 31, 1988 account in an annuity.