Who Is an Eligible Designated Beneficiary?
Decipher the specific criteria for qualifying as an Eligible Designated Beneficiary and the significant implications for inherited retirement account distributions.
Designating beneficiaries for retirement accounts is a crucial component of financial planning. These designations determine who will inherit assets held within Individual Retirement Accounts (IRAs) and other retirement plans upon the account owner’s passing. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in 2019, significantly modified the rules governing how inherited retirement accounts are distributed.
Understanding “Designated Beneficiary”
A “designated beneficiary” refers to an individual named by the account owner to inherit their retirement account. This means a living person, rather than an entity like an estate, a charity, or a trust that does not meet specific IRS “see-through” rules.
Under the SECURE Act, most designated beneficiaries are subject to the 10-year distribution rule. This rule mandates that the inherited retirement account must be fully distributed by December 31 of the tenth calendar year following the original account owner’s death. An “eligible designated beneficiary” represents a specific subgroup within the broader category of designated beneficiaries, granted more flexible distribution options.
Who Qualifies as an Eligible Designated Beneficiary
The SECURE Act established specific categories of individuals who qualify as an “eligible designated beneficiary” (EDB), allowing them more flexible distribution options. These categories are defined by their relationship to the deceased account owner or their personal circumstances.
The spouse of the deceased account owner is one such category of EDB. A surviving spouse has options, including rolling over inherited assets into their own IRA, treating it as if it were always their own. They can also choose to remain as a beneficiary, taking distributions over their own life expectancy, or opt for the 10-year rule.
A minor child of the deceased account owner also qualifies as an EDB. “Minor” is defined as an individual under the age of 21. While a minor child can initially stretch distributions over their own life expectancy, their EDB status ceases upon reaching age 21. At that point, the remaining balance in the inherited account typically becomes subject to the 10-year distribution rule, requiring full withdrawal within ten years of turning 21. This EDB status is specifically for the account owner’s own minor children.
Individuals who meet the IRS definition of disabled are also considered EDBs. This generally requires an inability to engage in substantial gainful activity due to a medically determinable physical or mental impairment. Chronically ill individuals also qualify as EDBs, defined as being unable to perform at least two activities of daily living without substantial assistance, or requiring substantial supervision due to severe cognitive impairment.
Finally, any individual who is not more than 10 years younger than the deceased account owner qualifies as an EDB. This category typically applies to siblings, close relatives, or friends near the same age as the original account holder.
Special Distribution Rules for Eligible Designated Beneficiaries
Eligible designated beneficiaries (EDBs) benefit from specific, more favorable distribution rules compared to other beneficiaries.
A primary benefit for EDBs is the option to stretch distributions over their own life expectancy. This allows for smaller, more gradual withdrawals, enabling inherited assets to continue growing tax-deferred for an extended period. Required Minimum Distributions (RMDs) for EDBs are calculated annually based on their life expectancy.
The spousal rollover option remains a distinct choice for surviving spouses. Instead of taking distributions as an EDB, a surviving spouse can roll the inherited IRA into their own IRA. This allows them to treat the inherited funds as their own, delaying RMDs until they reach their own required beginning date (RBD).
Contrasting with Other Beneficiary Categories
The classification of an “eligible designated beneficiary” stands apart from other beneficiary types due to the distinct distribution rules that apply.
Non-eligible designated beneficiaries are individual beneficiaries who do not meet the criteria for EDB status. These include adult children (age 21 and older), grandchildren, or other non-spouse individuals more than 10 years younger than the original account owner. These beneficiaries are generally subject to the 10-year rule, meaning the inherited account must be fully distributed by the end of the tenth calendar year following the account owner’s death.
In contrast, non-designated beneficiaries are entities that do not have a life expectancy, such as estates, charities, or certain trusts that do not qualify as “see-through” trusts. If the original account owner died before their required beginning date for RMDs, the inherited account is typically subject to the 5-year rule, requiring full distribution by the end of the fifth year following death. If the account owner died on or after their RBD, distributions must continue over what would have been the original owner’s remaining life expectancy.
Identifying an eligible designated beneficiary is important for managing inherited retirement assets. The ability to stretch distributions over a lifetime, as available to EDBs, offers significant advantages in terms of continued tax-deferred growth and managing tax liabilities.