Chris Robinson, CHFC
Under the Secure Act, there are only three types of beneficiaries for 401k plans, 403b plans, and traditional as well as Roth IRA’s.
The Secure Act generally eliminated the lifetime stretch and implemented a 10-year rule for the distribution of plan assets. This is for deaths of IRA or plan owners occurring after 2019.
Under the Secure Act, there are three types of retirement plan beneficiaries:
1. Non-Designated Beneficiary (NDB)
2. Non-Eligible Beneficiary (NEDB)
3. Eligible Beneficiary (EDB)
Non-Designated Beneficiary (NDB)
These are not people. Some examples are estates, charities, or non-qualifying trusts.
Payout rules for NDBs are based on whether the IRA owner or plan participant dies before or after the owner’s RBD (Required Beginning Date). The required beginning date is when required minimum distributions are required to start. This is generally April 1 after the year of the 73rd birthday.
If the owner dies before the RBD, the account must be withdrawn by the end of the fifth year after the year of death. This is the 5-year rule. There are no RMDs during the five-year window.
If the plan owner dies on or after the RBD, then RMDs must be taken over the deceased’s remaining single life expectancy; this is the ghost rule. This can produce a post-death payout exceeding 10 years.
Non-Eligible Designated Beneficiary or NEDB
This is the 10-year rule.
These are all designated beneficiaries (listed as beneficiaries on the account) who do not qualify as Eligible (Eligible for stretch) Designated Beneficiaries.
For example: grandchildren, older children, some look through trusts
Payout rules depend on whether death occurs before or after the required beginning date.
If the owner dies before their RBD, then there are no required minimum distributions during the 10-year period.
If the owner dies on or after the RBD, then annual RMDs must be taken years 1-9.
The entire account must be emptied by the end of the 10th year after the year of death.
Eligible Designated Beneficiary (EDB)
These beneficiaries are exempt from the 10-year rule. They must be designated beneficiaries.
There are five classes of Eligible Designated Beneficiaries:
1. Surviving spouses
2. Minor children of the account owner until age 21, but not grandchildren
3. Disabled individuals—under IRS rules
4. Chronically ill individuals
5. Individuals not more than 10 years younger than the IRA owner. They can be older than the owner.
Status is determined at the date of the owner’s death and cannot be changed.
Once an EDB no longer qualifies as an EDB, or dies, the 10-year rule is applied to them, or for their beneficiaries (successor beneficiaries).
As you can see, beneficiaries can be a confusing topic. At RFG Wealth Advisory in Argyle, Texas, we help clarify the confusion that sometimes accompanies financial planning.
Contact Chris Robinson, the lead advisor at RFG Wealth Advisory in Argyle, Texas, at 940-464-4104. Let’s schedule a time to discuss how RFG can help clarify plans for your financial future. At RFG Wealth, our fiduciary duty ensures your interests always come first, and we maintain a transparent fee structure for your peace of mind.
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Investment advice is offered through RFG Wealth Advisory, a Registered Investment Advisor.