What is an eligible designated beneficiary?
An eligible designated beneficiary (EDB) is a person included in a single classification of retirement account beneficiaries.
An individual can be classified as an EDB if they fall into one of the five categories of individuals identified in the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
Key points to remember
- An eligible designated beneficiary (EDB) is a classification for certain people who inherit a retirement account.
- The duration and criteria for EDBs were established in the SECURE Act, which was passed in December 2019 and comes into effect for legacy retirement accounts from January 1, 2020.
- There are five categories of people who are considered EDBs, including the common category of surviving spouses.
- These people get special treatment and more flexibility to withdraw funds from their inherited accounts than other beneficiaries.
Understanding the Eligible Designated Beneficiary
As a result of the SECURE Act, there are now three classifications of beneficiaries based on the individual’s relationship to the original account holder, the beneficiary’s age, and their status as an individual or entity no-person.
An eligible designated beneficiary (EDB) is always an individual. In other words, an EDB cannot be an entity other than a person, such as a trust, estate, or charity; these are considered unnamed beneficiaries.
There are five categories of individuals included in the EDB classification:
- Owner’s surviving spouse
- The owner’s child under the age of 18
- A disabled person
- A person with a chronic illness
- Any other person who is no more than 10 years younger than the deceased IRA owner
In most cases, except for the exceptions below, an EDB must withdraw the inherited IRA account balance over the life expectancy of the beneficiary.
Exceptions to EDB Rules
There is optional special treatment allowed only for surviving spouses, which is explained below. Additionally, once a minor child reaches the age of majority, they are no longer considered an EDB, and the 10-year rule regarding withdrawal requirements for a named beneficiary comes into effect.
Types of eligible designated beneficiaries
Here are more details on each of the five categories of EDB.
Owner’s surviving spouse
This common category of retirement account beneficiaries is included in the classification of eligible designated beneficiaries. Surviving spouses also get special treatment, allowing them to step into the owner’s shoes and withdraw the IRA balance over the original owner’s life expectancy.
Alternatively, a surviving spouse can incorporate an inherited IRA into their own IRA and make withdrawals when they would normally take their own required minimum distributions (RMDs).
Minor child of the owner
A child who has not reached the age of 18 is allowed to make withdrawals from an inherited retirement account using their own life expectancy. However, once the child turns 18, the 10-year rule for named beneficiaries (who are not EDBs) comes into effect. At that time, the child would have until December 31 of the 10th year following their 18th birthday to withdraw all funds from the inherited retirement account.
A minor child of a deceased retirement account holder may be granted an extension, to age 26, for the 10-year rule to take effect, provided the child is pursuing a retirement program. determined studies.
According to the Internal Revenue Service (IRS), “Section 72(m)(7) of the Code provides that a person is considered disabled if he or she is unable to engage in any substantial gainful occupation by reason of one or mental impairment that can be expected to lead to death or be of long duration and of indefinite duration.” A disabled person who inherits a retirement account is allowed to use their own life expectancy to calculate RMDs.
Person with a chronic illness
IRS Code Section 7702B(c)(2)(A) states that “‘Chronically ill person’ means any person who has been certified by a licensed health care practitioner as—
- (i) be unable to perform (without substantial assistance from another person) at least 2 activities of daily living for a period of at least 90 days due to loss of functional ability,
- (ii) having a similar level of disability (as determined under regulations prescribed by the Secretary in consultation with the Secretary of Health and Human Services) to the level of disability described in paragraph (i), or
- (iii) requiring substantial supervision to protect that individual from health and safety threats due to severe cognitive impairment.
A chronically ill person who inherits a retirement account is allowed to use their own life expectancy to calculate RMDs.
Any other person not more than 10 years younger than the deceased person
This category is a unique catch-all that includes certain friends and siblings (depending on age) who are identified as beneficiaries of a retirement account. This last category also excludes most adult children (who are not disabled or chronically ill) from the five EDB categories. A person in this category who inherits a retirement account is allowed to use their own life expectancy to calculate RMDs.
What did the SECURE law do?
The SECURE Act mainly reformed the rules on how companies offer retirement plans to employees.
What is a beneficiary vs. a beneficiary designation?
A beneficiary is a person or entity that receives part of an inherited estate. A designated beneficiary refers to a specific person or entity that was named and documented by the estate owner prior to their death.
Who can inherit Qualified Retirement Accounts?
If a person dies with a qualified retirement account like an IRA or 401(k), only an eligible designated beneficiary (EDB), as defined by law, can take possession of it. This must be a person who is usually the surviving spouse, an adult child, or a disabled or chronically ill person who can benefit from the funds.