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Who is Considered an Eligible Designated Beneficiary on an IRA?

September 12, 2022

Wondering who you can name as an eligible designated beneficiary on your retirement accounts? Can you name your adult child? We explore here.

With the elimination of the stretch IRA provision for retirement account beneficiaries, there are some misconceptions on who is considered an eligible designated beneficiary. We shed some light on the new classification below.

What is an eligible designated beneficiary (EDB)?

This is a term established in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is effective for individual retirement accounts (IRAs) as of January 1, 2020.

Important to note, the SECURE Act eliminated “Stretch” IRAs, so now inherited IRAs with non-spouse beneficiaries (i.e. children or grandchildren) must be withdrawn within 10 years versus the beneficiary utilizing their life expectancy tables, in effect ‘stretching the IRA’. There are no required distributions within that 10 year period, but by the end of the 10thyear, the entire balance must be distributed.

PLEASE NOTE: The IRS has proposed regulations to require Non EDBs to take minimum distributions throughout the 10 year period and fully disburse by the end of the 10 years. This could cause potential penalties for any beneficiaries who did not take distributions for 2021 related to a decedent who died after 2019.

How are eligible designated beneficiaries determined?

The SECURE Act distinguishes between an eligible designated beneficiary and other beneficiaries who inherit an IRA. These new rules apply for individuals with accounts who die after December 31, 2019. Under these new rules, an eligible designated beneficiary is

  1. A surviving spouse,
  2. A disabled individual,
  3. A chronically ill individual,
  4. A minor child (under 18), or
  5. An individual who is not more than ten years younger than the account owner.

This means that the following are NOT EDBs:

  • Adult children without disabilities
  • Trusts, estates, charities

Only the five individuals listed above can continue to take distributions over their life expectancy from IRAs. Hence any beneficiary who does not fall into one of the above five categories is required to receive a full distribution of the assets in the inherited account by the end of the tenth year after the account owner’s death.

Beneficiaries who inherited an IRA before December 31, 2019 can still utilize the stretch IRA provisions and take life expectancy payments.

We’ll keep you posted on the proposed regs and if they become finalized.

Questions on your EDPs? We can help.

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