What Is a Non-Eligible Designated Beneficiary?

When inheriting a retirement account, the rules for withdrawing funds depend on the beneficiary’s classification. The SECURE Act of 2019 altered these rules, creating the “non-eligible designated beneficiary” category. This classification dictates a specific timeline for account distributions and directly impacts the financial planning and tax obligations for most non-spouse inheritors.

Determining Beneficiary Status

The SECURE Act established two classes for individual beneficiaries: eligible designated beneficiaries (EDBs) and non-eligible designated beneficiaries (NEDBs). EDBs are granted more favorable withdrawal options, often allowing them to take distributions over their own life expectancy. This provision allows the funds to grow tax-deferred for a longer period.

There are five groups of EDBs: the surviving spouse, a minor child of the account owner, a disabled or chronically ill individual, and any beneficiary not more than 10 years younger than the deceased account owner. A minor child’s EDB status ends when they turn 21. To qualify as disabled or chronically ill, an individual must meet definitions in the Internal Revenue Code and may need to provide certification to the plan administrator.

Any individual beneficiary who does not fall into one of the EDB categories is classified as a non-eligible designated beneficiary. This is a broad category that includes most non-spouse inheritors, such as adult children, grandchildren, siblings, or friends who do not meet the age proximity requirement.

The 10 Year Withdrawal Rule

For NEDBs, the SECURE Act implemented the 10-year rule for deaths occurring in 2020 or later. This rule mandates that the entire balance of the inherited account must be distributed by the end of the tenth calendar year following the year the original account owner died. This applies to both traditional and Roth inherited IRAs.

The 10-year clock starts on January 1st of the year after the owner’s death, with the final deadline on December 31st of the tenth year. For example, if an account owner died in 2024, the NEDB must withdraw all funds by December 31, 2034.

A beneficiary can take distributions periodically or as a single lump sum anytime within the 10-year window. Failing to empty the account by the deadline results in a significant penalty on the amount that should have been withdrawn. Whether annual withdrawals are required during this period depends on the original account owner’s age.

Required Minimum Distributions Within the 10 Year Period

Whether an NEDB must take annual withdrawals during the 10-year period depends on if the original account owner died before or after their Required Beginning Date (RBD). The RBD is the date an owner must start taking their own required minimum distributions (RMDs), which is generally April 1 of the year after they turn 73.

If the original account owner died before their RBD, the NEDB is not required to take annual RMDs in years one through nine. They can take distributions of any amount at any time, as long as the account is emptied by the 10-year deadline. This allows the beneficiary to manage the timing of income and associated taxes.

If the account owner died on or after their RBD, the NEDB must empty the account by the 10-year deadline and take annual RMDs for years one through nine. These annual RMDs are calculated based on the beneficiary’s own life expectancy.

This dual requirement caused confusion, leading the IRS to issue transitional relief. The IRS waived the penalty for failing to take these annual RMDs for 2021 through 2024. However, the agency has indicated it will finalize regulations making these annual RMDs mandatory starting in 2025 for those who inherited from an owner who had reached their RBD.

Pre-SECURE Act Rules for Inherited Accounts

For accounts inherited from an owner who died before January 1, 2020, a different set of rules applies. Prior to the SECURE Act, regulations offered a tax-deferral advantage known as the “stretch IRA.” This method allowed most designated beneficiaries to take distributions over their own life expectancy.

Under the stretch provision, a younger beneficiary could take small annual RMDs, allowing the inherited assets to remain in the tax-deferred account and grow for many years. For example, a 40-year-old who inherited an IRA could stretch the distributions over their life expectancy of more than 40 years. This strategy was a powerful tool for wealth transfer that minimized the annual tax impact.

These more generous stretch rules are not available for any inheritance where the original account owner’s death occurred in 2020 or later, which is when the 10-year rule took effect.