What Is an Eligible Designated Beneficiary?

An eligible designated beneficiary (EDB) is included in a unique classification of retirement account beneficiaries. According to the Internal Revenue Service (IRS), EDBs are defined 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.

Understanding the EDB

An eligible designated beneficiary (EDB) is always an individual. An EDB cannot be a nonperson entity such as a trust, an estate, or a charity, considered not designated beneficiaries. Five categories of EDBs include:

• Surviving Spouse
• Minor child less than 18 years of age
• A disabled individual
• A chronically ill individual
• Any other individual who is not more than ten years younger than the deceased account owner

An EDB can take a lump sum distribution of the entire inherited account, withdraw the balance from the inherited IRA account over their life expectancy with required minimum distributions (RMDs) calculated annually by the plan, or follow the 10-year rule and empty the entire account by the end of the 10th year following the year of the account owner's death.

Distributions from a qualified retirement plan, such as a 401(k) or profit-sharing plan are determined by the plan administrator who should provide the beneficiaries with their distribution options. All beneficiaries must include taxable distributions in their gross income when filing taxes.

Types of Eligible Designated Beneficiaries

Surviving Spouse

Surviving spouses receive special treatment, allowing them to withdraw the balance from an IRA over the original owner's life expectancy. Alternatively, a surviving spouse can roll an inherited IRA into their own IRA and withdraw when they take their own required minimum distributions (RMDs). Distributions from a qualified retirement plan, such as a 401(k) are determined by the plan administrator, and surviving spouses generally have flexibility when making withdrawals.

Owner's Minor Child

A child who has not reached the age of 18, the age of majority in many states, is permitted to withdraw from an inherited retirement account using their life expectancy. When the child reaches the age of 18, the 10-year rule for designated beneficiaries who are not EDBs goes into effect. The child has until Dec. 31 of the 10th year following their legal age birthday to withdraw all funds from the inherited retirement account.

Disabled Individual

According to the Internal Revenue Service (IRS), "Section 72(m)(7) of the Code provides that an individual shall be considered to be disabled if they are unable to engage in any substantial gainful activity because of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration." A disabled individual who inherits a retirement account will use their life expectancy to calculate RMDs.

Chronically Ill Individual

The IRS Code Section 7702B(c)(2)(A) states the term ‘chronically ill individual’ means any individual who has been certified by a licensed healthcare practitioner as—

• (i) being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for at least 90 days due to a loss of functional capacity,
• (ii) having a level of disability similar (as determined under regulations prescribed by the Secretary in consultation with the Secretary of Health and Human Services) to the level of disability described in clause (i), or
• (iii) requiring substantial supervision to protect such individuals from threats to health and safety due to severe cognitive impairment.

A chronically ill individual who inherits a retirement account is allowed to use their life expectancy to calculate RMDs.

Any Other Individual Not More Than 10 Years Younger Than the Decedent

This category is a unique catch-all that includes certain friends and siblings who are identified as beneficiaries of a retirement account. An individual in this category who inherits a retirement account is allowed to use their life expectancy to calculate RMDs.

The Bottom Line

An eligible designated beneficiary (EDB) is a classification for individuals who inherit a retirement account. Five categories of individuals are considered EDBs and include surviving spouses and minor children. Distributions from a qualified retirement plan, such as a 401(k) or profit-sharing plan are determined by the plan administrator who provides the beneficiaries with distribution options.