The 3 IRA Beneficiary Categories - Again and Again and Again
This past week the Ed Slott team hosted another successful conference for our Elite IRA Advisor Group members. Well over 300 advisors from across the country descended on Washington D.C. for two days of intense IRA training. In addition to discussing all the newest SECURE 2.0 rules, we made sure to cover the foundational beneficiary principles created by the original SECURE Act, which went into effect in 2020. It is our steadfast belief – and our member advisors agree – the best way to learn new concepts is through repetition and reinforcement.
So, when we discussed the three beneficiary categories created by the SECURE Act, the response was not, “Oh, this again?” Instead, our advisor group, dedicated and committed to helping their clients and prospects, leaned in. As a team, we all appreciate the importance of identifying the proper IRA beneficiary category, understanding the rules applicable to each class, and implementing the correct inherited IRA payout structure. Repetition, repetition, repetition.
Here at the Slott Report, we have written numerous articles referring to “eligible designated beneficiaries” (EDBs), “non-eligible designated beneficiaries” (NEDBs), and “non-designated beneficiaries” (NDBs). Such conversations can go on indefinitely as different circumstances create an unending number of possible scenarios. However, as a basic refresher, the three SECURE Act IRA beneficiary categories (and their applicable payout rules), are as follows:
1. Non-Designated Beneficiary (NDB).
These are not people (for example, an estate or a charity). If the IRA owner dies before the required beginning date (“RBD” - April 1 after the year of the 73rd birthday), the inherited IRA account must be withdrawn by the end of the 5th year after death – the 5-year rule. If the owner dies on or after the RBD, required minimum distributions (RMDs) must be taken over the deceased IRA owner’s remaining single life expectancy – what we call the “ghost rule.”
2. Non-Eligible Designated Beneficiary (NEDB)
This group includes all living people who do not qualify as EDBs (defined below). NEDBs receive the 10-year payout rule. The NEDB 10-year payout structure is predicated on when the IRA owner died in relation to the RBD. If death is before the RBD, there are no annual RMDs during the 10-year window. If death comes on or after the RBD, annual RMDs apply within the 10 years.
3. Eligible Designated Beneficiary (EDB)
These living people can still choose to stretch RMD payments from the inherited IRA over their own single life expectancy. This group includes surviving spouses; minor children of the account owner until age 21; disabled individuals; chronically ill individuals; and those not more than 10 years younger than the IRA owner.
This brief overview of the beneficiary groups created by the SECURE Act could easily be expanded into a full day of training. Real-life permutation and different scenarios require an absolute mastery of these rules to ensure a proper outcome. (And this article does not even mention successor beneficiaries or the additional benefits afforded to spouses.) Bottom line: There is no substitute for a dedicated advisor who knows these categories cold.
By Andy Ives, CFP®, AIF®
Ed Slott and Company, LLC
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.