In my last article, I talked about non-Eligible Beneficiaries of inherited IRAs. In this article, I’ll explain non-spouse Eligible Beneficiaries (EDBs).
Are You an Eligible Designated Beneficiary (EDB)?
To be an Eligible Designated Beneficiary (EDB), you need to answer "YES" to at least one of these questions:
· Are you a minor child of the person who passed away?
· Do you have a disability or chronic illness?
· Are you within 10 years older or younger than the person who passed away?
· Are you a spouse? (This will be covered in the next article.)
If you answered "Yes" to any of these, you’re an Eligible Designated Beneficiary (EDB).
Who Can Be an EDB?
1. Minor Child of the Deceased IRA Holder:
A minor child of the original IRA owner can take money from the IRA based on their life expectancy. Once the child turns 18 or 21 (depending on the state), they must withdraw all the money within 10 years.
2. Disabled Beneficiaries:
A disabled beneficiary is someone who can’t take care of their financial affairs because of a physical or mental condition. If the person is disabled when the original IRA owner passes away, they can take money from the IRA based on their life expectancy.
3. Chronically Ill Beneficiaries:
This includes people who can’t do at least two everyday activities (like eating or dressing) or who need supervision because of serious memory or thinking problems. These people can also take money from the IRA based on their life expectancy.
4. Beneficiaries Close in Age to the IRA Owner:
If you are within 10 years of the IRA owner’s age, like a sibling, you can take money from the IRA based on your life expectancy.
Key Rules for Eligible Designated Beneficiaries (EDBs)
1. Life Expectancy Rule:
EDBs can stretch their withdrawals over their life expectancy, meaning they can take smaller amounts each year instead of having to take out all the money in 10 years.
o This is especially helpful for spouses and minor children because it lets them take out money based on their age and allows the account to keep growing tax-free for a longer time.
2. Required Minimum Distributions (RMDs):
For EDBs, they must start taking money out of the IRA by December 31 of the year after the person who passed away.
o The amount they need to take out depends on their life expectancy. If their life expectancy factor is 20, they take 1/20 of the IRA balance the first year.
o Each year, the factor goes down by one (for example, 1/19 in year two, 1/18 in year three), meaning the amount they take out each year increases as they get older.
3. What Happens if the EDB Dies?
o If an EDB dies before they finish taking out all the money, their heirs (the people they leave the IRA to) are no longer considered EDBs. They will have to follow the 10-year rule and take out all the money within 10 years of inheriting the IRA.
Should EDBs Plan Ahead?
Even though the rules for EDBs aren’t as complicated as for non-EDBs, it’s still a good idea to talk to a professional to make sure everything is done right.
If you have any questions or need help, feel free to reach out. We’re here to help!
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