Naming a Minor as Your IRA Beneficiary

If you're contemplating designating a child or grandchild as the beneficiary of your Individual Retirement Account (IRA), you need to be aware of how the SECURE Act has reshaped the landscape. Before the act took effect in January 2020, it was advantageous to name a minor as an IRA beneficiary. Doing so could allow for the "stretching" of IRA distributions across many years, leveraging the young beneficiary’s long life expectancy.

However, the SECURE Act has substantially altered the rules. Updating your estate planning approach is crucial if you aim to pass on your retirement savings to a younger generation. The once-favored "stretch IRA" is now largely defunct, replaced by a 10-year payout rule that applies to most beneficiaries, minors included.

Special Provisions for IRA Owners' Minor Children

Unique rules are in place for the minor children of IRA owners. These children are categorized as eligible designated beneficiaries (EDBs), allowing them to base required minimum distributions (RMDs) on their own life expectancy until they reach the age of majority (21). At that point, the 10-year rule kicks in.

Example: Janet, 8 years old in 2020, inherits an IRA from her father. She qualifies as an EDB, allowing her to stretch RMDs over her life expectancy for 13 years until she turns 21 in 2033. From that point, the 10-year rule applies, requiring her to empty the IRA account by December 31, 2043.

Rules for Grandchildren and Other Minors

If you're considering designating a grandchild, niece, or nephew as your IRA beneficiary, note that they cannot defer the 10-year rule until age 21 unless they are your minor children. For these beneficiaries, the 10-year rule is applicable immediately upon your death. If you pass away before reaching your Required Beginning Date (RBD), no annual RMDs would be mandated during this 10-year window.

Example: Grace, who is 82, passes away in 2023. Her IRA beneficiary is her 11-year-old grandchild, Kelly. Since Kelly is not Grace's child, Kelly doesn't qualify as an EDB. Therefore, Kelly must take RMDs based on her own life expectancy from 2024 to 2032 and fully deplete the account by December 31, 2033.

Understanding these rules and speaking with your financial planner can help you make informed decisions about naming minors as your IRA beneficiaries and how it affects your overall estate planning strategy.