The goal of a solid retirement withdrawal strategy is to enjoy one’s hard-earned funds without running out of money. But what options do you have when deciding what happens to any remaining assets?
Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, you’re able to name different types of beneficiaries—individuals who will inherit your accounts. Here’s a look at what’s often seen as the most advantaged type: an eligible designated beneficiary.
What Are Eligible Designated Beneficiaries?
Simply put, an eligible designated beneficiary (EDB) is a classification for someone who inherits an IRA or other form of retirement account. According to the SECURE Act, only the following five types of individuals can qualify for EDB classification:
- The account owner’s surviving spouse
- The owner’s minor child
- A disabled individual
- A chronically ill individual
- Any other individual who is no more than 10 years younger than the account owner.
One of the key differences between eligible designated beneficiaries and designated beneficiaries is exemption from the 10-year rule. In other words, EDBs are able to withdraw the account’s funds over their own life expectancy, whereas designated beneficiares must withdraw the full amount within 10 years of the owner’s passing.
Considering the tax implications, individuals often choose to select eligible designated beneficiaries, rather than other types of beneficiaries, for tax purposes. EDBs will owe taxes on the minimum distributions (RMDs) they receive from the inherited IRA, but because they can flexibly make withdrawals over their life, they’ll face smaller RMDs and, as a result, lower tax rates.
Naming Your EDBs: Common Mistakes to Avoid
Not naming an EDB for all of your assets
Your assets and retirement funds can’t sit around forever, and you don’t want them going to waste. Naming an eligible designated beneficiary will help ensure your funds don’t wind up in probate, a long, tedious process that delays your loved ones from receiving your assets. Wealth advisors, such as our expert team at Ironwood Wealth Management, can walk you through your accounts and help you correctly name an eligible designated beneficiary for every asset.
Not updating your beneficiaries
Too often, individuals select an eligible designated beneficiary and then forget to come back and review their selections. This can become especially problematic following major life changes, such as divorces, remarriages, or the death of a loved one who had been named an EDB. Be sure to revisit your account and policies at least once every year, or your assets may end up in the hands of someone you don’t want receiving your benefits.
Not considering the impact of your designations
Not all beneficiaries may be able to handle a large influx of money. A young adult child, for example, who is may not be prepared to manage your assets, could wind up making costly short-sighted decisions that result in the loss of the asset. If you’ve named a disabled EDB, they could lose valuable government benefits if they end up with too many assets to qualify.
Not including enough detail in your designations
When making your beneficiary selections, you need to be as specific as possible. Many people often list generic terms, such as “children,” which can end up causing problems down the line, such as an estranged family member trying to claim some of your assets.
Need More Guidance on Selecting Your EDBs?
Naming beneficiaries, and retirement planning as a whole, can be complex and confusing, but it’s crucial to ensuring your assets are handled the way you desire. Here at Ironwood Wealth Management, we work closely with you to understand your individual financial situation and come up with a personalized approach to meeting your estate planning goals. Contact us today to learn more.
