What Is an Eligible Designated Beneficiary?
An eligible designated beneficiary (EDB) is a person included in a unique classification of retirement account beneficiaries. An individual may be classified as an EDB if they fall into any one of five categories of individuals identified in the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act passed in December 2019 and is effective for all inherited retirement accounts as of September 2021.
- An eligible designated beneficiary (EDB) is a classification for certain individuals who inherit a retirement account.
- The term and criteria for EDBs were established in the SECURE Act, which passed in December 2019 and is effective for inherited retirement accounts as of Jan. 1, 2020.
- There are five categories of individuals who are considered to be EDBs, including the common category of surviving spouses.
- These individuals receive special treatment and a higher degree of flexibility in withdrawing 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 owner, the beneficiary's age, and their status as either an individual or a non-person entity. An eligible designated beneficiary (EDB) is always an individual. In other words, an EDB cannot be a nonperson entity—such as a trust, an estate, or a charity; these are considered not designated beneficiaries. There are five categories of individuals included in the EDB classification:
- The owner’s surviving spouse
- The owner’s child who is less than 18 years of age
- A disabled individual
- A chronically ill individual
- Any other individual who is not more than 10 years younger than the deceased IRA owner
In most instances, save for the exceptions below, an EDB must withdraw the balance from the inherited IRA account over the beneficiary’s life expectancy.
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 to be an EDB, and the 10-year rule relating to withdrawal requirements for a designated beneficiary kicks in.
Types of Eligible Designated Beneficiaries
Here are more details on each of the five categories of EDBs.
Owner's Surviving Spouse
This common category of retirement account beneficiaries is included in the eligible designated beneficiary classification. Surviving spouses also receive special treatment, which allows them to step into the shoes of the owner and withdraw the balance from the IRA over the original owner's life expectancy. Alternatively, a surviving spouse can roll an inherited IRA into their own IRA and take withdrawals when they normally would take their own required minimum distributions (RMDs).
Owner's Minor Child
A child who has not reached the age of 18 is permitted to make withdrawals from an inherited retirement account using their own life expectancy. However, as soon as the child reaches the age of 18, the 10-year rule for designated beneficiaries (who are not EDBs) goes into effect. At that time, the child would have until Dec. 31 of the 10th year following their 18th birthday to withdraw all funds from the inherited retirement account.
A deceased retirement account owner's minor child may get an extension, up until age 26, for the 10-year rule to go into effect, provided the child is pursuing a specified course of education.
According to the Internal Revenue Service (IRS), "Section 72(m)(7) of the Code provides that an individual shall be considered to be disabled if they are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration." A disabled individual who inherits a retirement account is allowed to use their own life expectancy to calculate RMDs.
Chronically Ill Individual
The IRS Code Section 7702B(c)(2)(A) states that "the term ‘chronically ill individual’ means any individual who has been certified by a licensed healthcare practitioner as—
(i) being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for a period of at least 90 days due to a loss of functional capacity,
(ii) having a level of disability similar (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 clause (i), or
(iii) requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment.
A chronically ill individual who inherits a retirement account is allowed to use their own life expectancy to calculate RMDs.
Any Other Individual Not More Than 10 Years Younger Than the Decedent
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 final category also excludes most adult children (who are not disabled or chronically ill) from the five categories of EDBs. An individual in this category who inherits a retirement account is allowed to use their own life expectancy to calculate RMDs.