So Many IRA Beneficiary Variables!

Monday, November 25, 2024

By Andy Ives, CFP®, AIF®
IRA Analyst

When an IRA owner dies, what is the payout schedule for the beneficiary? The key to distinguishing the correct program (i.e., 10-year rule, stretch RMDs, 5-year rule, etc.) is to identify all the important variables. But there are so many! Nevertheless, each detail must be considered. Every scenario requires that we navigate through a mental flow chart. The correct answer lies at the end of every beneficiary maze.

For example, questions that we must definitively ask include:

1. When did the original IRA owner die? This is the foundational question for every case. If the answer is 2019 or earlier, then the “old rules” apply. The SECURE Act does not apply to deaths prior to 2020. So, we literally have two sets of rules to maintain within our mental filing cabinet. The answer to Question #1 dictates which filing drawer of information we access.

2. How old was the original owner when he died/RBD? After identifying when the IRA owner died (assume it was after the SECURE Act), we must know how old the person was at death. Did he die before or after the required beginning date (RBD)? It is imperative to know if required minimum distributions (RMDs) were started by the deceased IRA owner.

3. Is this a Roth or traditional IRA? This question is often overlooked. The payout rules are slightly different for Roth and traditional IRAs. Since RMDs do not apply to Roth IRA owners while they are alive, Roth IRA owners are always deemed to have died before the RBD. (As such, Question #2 is irrelevant for Roth IRAs.)

4. Who/what type of beneficiary is listed (NDB, EDB or NEDB)? This is the biggie. Questions #1 – 3 narrow the scope of each beneficiary situation. Question #4 about the type of beneficiary nails down the applicable payout.

  • If the beneficiary is a Non-Designated Beneficiary (NDB, or what I like to call a “non-person”), then we have either the 5-year rule or the “ghost rule” depending on the age of the deceased (Question #2).
  • If the beneficiary is a Non-Eligible Designated Beneficiary (NEDB), then we have the 10-year rule. Whether annual RMDs apply in years 1 – 9 of the 10-year rule is also dictated by Question #2 above. If RMDs were started by the deceased IRA owner, then they must continue within the 10-year period.
  • If the beneficiary is an Eligible Designated Beneficiary (EDB), then we have a full stretch RMD situation. RMDs based on the single life expectancy of the beneficiary must begin in the year after the year of death.

These four questions will lead us nearly to the end of the “beneficiary payout mental flowchart.” However, there are always minor tweaks. For example, if death is before the RBD (Q2), then an EDB can choose between the 10-year rule or a full lifetime stretch. Also, don’t forget to ask if we are talking about an inherited IRA that was already passed to the first beneficiary. If such is the case, then we must open our mental file cabinet drawer containing the “Successor Beneficiary Rules.” Without knowing ALL the variables, it is impossible to answer a beneficiary payout question accurately. Each and every situation requires a meticulous navigation of what is nothing more than an “if this, then that” flow chart. The proper answer does exist at the end.

Post Views: 1,170

Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.

For white papers/other outflow pieces:

Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:

Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:

Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.