What Is an Eligible Designated Beneficiary?
An eligible designated beneficiary (EDB) belongs to a special group of beneficiaries of retirement accounts. According to the Internal Revenue Service (IRS), EDBs are individuals classified as a spouse, a minor child of the deceased, a disabled person, a chronically ill individual, or an individual not more than ten years younger than the retirement account owner or participant.
- An eligible designated beneficiary (EDB) is a classification for individuals inheriting a retirement account.
- There are five categories of individuals recognized as EDBs, including surviving spouses.
- These beneficiaries have more flexibility with fund withdrawals from their inherited accounts compared to other beneficiaries.
- Distributions from a qualified retirement plan, like a 401(k) or profit-sharing plan, are determined by the plan administrator, who should present distribution options to the beneficiaries.
Understanding the EDB
An eligible designated beneficiary (EDB) always refers to an individual. An EDB cannot be a non-person entity like a trust, an estate, or a charity, as these are not considered designated beneficiaries. The five categories of EDBs include:
- Surviving Spouse
- Minor child, aged below 18
- A disabled individual
- A chronically ill individual
- Any other individual not more than ten years younger than the deceased account owner
An EDB has the option to take a lump sum distribution of the entire inherited account, withdraw the balance over their life expectancy with required minimum distributions (RMDs), or follow the 10-year rule and empty the account by the end of the 10th year post the account owner’s demise.
Distributions from a qualified retirement plan, such as a 401(k) or profit-sharing plan, are decided by the plan administrator, who must offer distribution choices to the beneficiaries. All beneficiaries need to report taxable distributions in their gross income when filing taxes.
Upon reaching the age of majority, a minor child no longer qualifies as an EDB, and the 10-year rule for withdrawal applies to designated beneficiaries.
Types of Eligible Designated Beneficiaries
Surviving Spouse
Surviving spouses are granted special withdrawal privileges, allowing them to spread IRA withdrawals over the original owner’s life expectancy. Alternatively, they can merge an inherited IRA into their own and make withdrawals alongside their required minimum distributions (RMDs). Plan administrators determine distributions from qualified retirement plans like 401(k)s, giving surviving spouses flexibility in their withdrawals.
Owner’s Minor Child
A child under 18 can withdraw from an inherited retirement account using their life expectancy. Upon reaching 18, the 10-year rule for non-EDB designated beneficiaries applies. The child must deplete the inherited retirement account by December 31 of the 10th year post their legal age birthday.
A deceased account owner’s minor child might get an extension up to age 26 for the 10-year rule, provided they are pursuing specified education.
Disabled Individual
As per IRS, a disabled individual inheriting a retirement account is deemed unable to engage in substantial gainful activity due to a health condition. They can utilize their life expectancy for RMD calculations.
Chronically Ill Individual
The IRS defines a ‘chronically ill individual’ as one needing assistance with daily activities due to physical or cognitive impairment. Such individuals inheriting retirement accounts can use their life expectancy for RMD calculations.
Any Other Individual Not More Than 10 Years Younger Than the Decedent
This catch-all category includes friends and siblings as beneficiaries. Individuals here inheriting retirement accounts can use their life expectancy to determine RMDs.
What Is a Beneficiary vs. a Designation Beneficiary?
A beneficiary receives part of an inherited estate, while a designation beneficiary is a specific person or entity designated by the estate owner before their passing.
What Is the Difference Between a Non-Spouse Beneficiary and an EDB?
If a non-spouse beneficiary does not qualify as an EDB, they must adhere to the 10-year rule and deplete the inherited account within a decade.
What Is a Lump Sum Distribution?
Beneficiaries of IRAs and most retirement plans can opt for a lump-sum distribution, withdrawing the entire account balance. These distributions are taxable when reported in the beneficiaries’ gross income during tax filing.
The Bottom Line
An eligible designated beneficiary (EDB) is a specific classification for individuals inheriting retirement accounts. These EDBs, including surviving spouses and minor children, have certain withdrawal flexibilities. Plan administrators of qualified retirement plans determine distributions, offering beneficiaries various options to choose from.