Retirement

What is Beneficiary?

A beneficiary is the person or entity you name to receive the money in your retirement account after you die. Beneficiary designations are legal contracts that bypass probate court, taking precedence over instructions left in a last will and testament. Ensuring these designations are accurate is a critical step in estate planning.

Inherited retirement assets are subject to strict IRS distribution rules. The SECURE Act of 2019 eliminated the 'stretch IRA' for most designated beneficiaries. Previously, beneficiaries could withdraw inherited assets slowly over their own life expectancies. Under current rules, non-spouse designated beneficiaries must fully distribute the inherited account's assets within 10 years of the owner's death.

Exceptions to the 10-year rule apply to 'Eligible Designated Beneficiaries' (EDBs). EDBs include surviving spouses, minor children of the deceased, disabled or chronically ill individuals, and beneficiaries who are not more than 10 years younger than the deceased. EDBs may still stretch distributions over their own life expectancies, though minor children must transition to the 10-year rule upon reaching the age of majority.

Quick Facts

Legal StatusOverrides will instructions and bypasses probate court

SECURE Act 10-Year RuleRequires full distribution within 10 years for most beneficiaries

Eligible Designated BeneficiariesSpouses, minor children, disabled, chronically ill, close in age

Tax TreatmentInherited traditional assets are taxable; Roth assets are generally tax-free

PRACTICAL EXAMPLE

An investor designates their adult child as the beneficiary of their traditional IRA. Upon the investor's death, the child must empty the account within 10 years. Because the assets are traditional, every dollar withdrawn is taxed as ordinary income to the child, who must manage withdrawals to avoid spikes in their tax bracket.

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RELATED TERMS

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IRAAn Individual Retirement Account that allows individuals to save for retirement with tax-free growth or on a tax-deferred basis.

Traditional IRAAn Individual Retirement Account funded with pre-tax or tax-deductible contributions, with taxes deferred until withdrawal.

Roth IRAAn Individual Retirement Account funded with after-tax contributions, offering tax-free growth and tax-free withdrawals in retirement.

401(k)An employer-sponsored, tax-advantaged retirement savings plan defined under Section 401(k) of the Internal Revenue Code.

RolloverThe process of transferring retirement funds from one tax-advantaged account to another, preserving tax-deferred status.

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