Inherited Retirement Plan? How to Easily Understand Payout Rules
Figuring out first which kind of beneficiary you are will make it easier to grasp the rules and timing on required distributions.


With the passage of the SECURE Act, there have been changes in required payouts for beneficiaries on retirement plans and IRAs that have many people in a state of confusion.
The retirement accounts that are affected by these rule changes include 401(k) plans, 403(b) plans, 457(b) plans and traditional IRAs and Roth IRAs. And keep in mind that with all but the Roth, these required payouts will trigger taxes.
Depending on when the original retirement plan owner dies, some of these beneficiaries have to pull the money out in five years, some have to pull the money out in 10 years while taking required minimum distributions (RMDs) for the first nine years, some get to pull the money out in 10 years without RMDs over the first nine years, some get to pull the money out over their life expectancy, and there’s even a beneficiary group that gets to stretch it over their life expectancy until they reach age 21, at which time they have to switch and follow the 10-year rule.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
It’s enough to make your head explode. Is there a simple way to organize and understand these rules so the beneficiaries can be prepared to know what rules and what category both they and their loved ones will fall under? The answer is yes.
A simple way to understand the different required retirement plan payouts is to start by dividing retirement plan beneficiaries into three groups:
- Non-designated beneficiaries.
- Non-eligible designated beneficiaries.
- Eligible designated beneficiaries.
Non-designated beneficiaries, or NDBs, are easily identified because they are not people. For example, this could be an estate or a charity or a non-look-through trust.
With NDBs, if the IRA owner or retirement plan participant dies before April 1 of the year after they turn 73, better known as the required beginning date (RBD), the retirement plan proceeds must be withdrawn by the end of the fifth year after death, and there are no annual RMDs during this five-year period.
If the IRA owner or retirement plan participant dies on or after the required beginning date, RMDs must be taken over the deceased original retirement plan owner's life expectancy. This could allow for a much longer post-death payout than five years, which could help minimize taxes.
The next category, non-eligible designated beneficiaries (NEDBs), will represent the largest group of beneficiaries. This group includes adult children who are 21 years of age or older and grandchildren.
With NEDBs, if the original retirement plan owner dies before the required beginning date, there are no annual RMDs, but all the money must be withdrawn by the end of the tenth year after the original owner's death, with taxes applied. This is known as the 10-year rule.
For this same group, if the original owner dies on or after the required beginning date, then there will be annual RMDs based on the beneficiary’s life expectancy that must be taken for years one to nine with the entire account to be emptied by the end of the 10th year after death, with all applicable taxes applying.
The final category of beneficiaries, the eligible designated beneficiaries (EDBs), have the sweetest deal since they are exempt from the 10-year rule, which means they can take their RMDs based on their life expectancy, which will normally result in a much smaller taxable distribution.
The two biggest groups that have this status would be a surviving spouse or a beneficiary not more than 10 years younger than the IRA owner, like a brother or sister. This can also include a beneficiary who’s older than the original IRA owner.
Other groups would include disabled individuals, chronically ill individuals and minor children of the original retirement account owner until they reach age 21, at which time the 10-year countdown would apply.
So that’s it. You can now identify which group you fall under and make sure you take your required retirement plan payouts appropriately to avoid penalties or paying unnecessary tax.
And while you’re at it, consider doing some planning on what you or your heirs can do to maximize the tax efficiency of your future withdrawals.
For example, while the original IRA owner is still alive, he or she might consider doing Roth conversions since the withdrawals would be tax-free for their heirs.
If you’re charitable-minded, consider leaving more of the pre-tax retirement money to a charity (a non-designated beneficiary) since the charity receives the funds tax-free. Then you could leave more of the non-retirement accounts to the heirs, which would trigger far less tax on withdrawals.
And remember: Even if the beneficiary has already inherited the IRA, regardless of which of the three categories they fall into, they can always take out more than the RMD, which if done in years where they fall into a lower tax bracket, can reduce the overall tax impact.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
Social Security Will Continue Sending Paper Checks Sparingly, Reversing Course
The Social Security Administration has backed off from plans to eliminate paper checks. However, it will only send checks in the mail as a matter of last resort.
-
Ask the Editor — Tax Questions on Four New Tax Deductions
Ask the Editor In this week's Ask the Editor Q&A, we answer tax questions from readers on four new tax deductions in the "One Big Beautiful Bill."
-
How Divorced Retirees Can Maximize Their Social Security Benefits: A Case Study
Susan discovered several years after she filed for Social Security that she is eligible to receive benefits based on her ex-spouse's earnings record. This case study explains how her new benefits are calculated and what her steps are to claim some of the money she missed.
-
From Piggy Banks to Portfolios: A Financial Planner's Guide to Talking to Your Kids About Money at Every Age
From toddlers to young adults, all kids can benefit from open conversations with their parents about spending and saving. Here's what to talk about — and when.
-
I'm an Investment Pro: Here's How Alternatives Could Inject Stability and Growth Into Your Portfolio
Alternative investments can often avoid the impact of volatility, counterbalancing the ups and downs of stocks and bonds during times of market stress.
-
A Financial Planner's Guide to Unlocking the Power of a 529 Plan
529 plans are still the gold standard for saving for college, especially for affluent families, though they are most effective when combined with other financial tools for a comprehensive strategy.
-
An Investment Strategist Takes a Practical Look at Alternative Investments
Alternatives can play an important role in a portfolio by offering different exposures and goals, but investors should carefully consider their complexity, costs, taxes and liquidity. Here's an alts primer.
-
Ready to Retire? Your Five-Year Business Exit Strategy
If you're a business owner looking to sell and retire, it can take years to complete the process. Use this five-year timeline to prepare and stay on track.
-
A Financial Planner's Prescription for the Headache of Multiple Retirement Accounts
Having a bunch of retirement accounts can cause unnecessary complications. Consolidation can make it easier to manage your savings and potentially improve investment outcomes.
-
Overpaying for Financial Advice? A Financial Planner's Guide to Fees
Take five minutes to review how much you're paying for financial advice. If you're overpaying, you could be better off with an adviser who charges a flat fee.