The beneficiary designation form for your self-directed IRA (SDIRA) can feel like a formality. It is anything but that. This form decides who inherits your account and largely decides how quickly your beneficiaries must withdraw the money and pay tax on it. They cannot change your choices. They can only live with them.
The Basic Payout Rules
The beneficiary distribution rules turn on two questions: what category of beneficiary inherits your IRA, and whether you die before or after your required beginning date (RBD), which is when your own required minimum distributions (RMDs) must start. There are three main types of beneficiaries.
Eligible designated beneficiaries (EDBs). This group includes your surviving spouse, your minor children (until they reach age 21), a disabled or chronically ill individual, and anyone not more than 10 years younger than you are when you die. EDBs generally may stretch distributions over their life expectancy. (This “stretch IRA” option is a favorable carryover from the pre-SECURE Act beneficiary rules.) If you die before your RBD, an EDB may choose the 10-year rule instead, although this option is not typically elected. If you die after your RBD, payments are based on the longer of the beneficiary's or your remaining life expectancy. A minor child's EDB status ends at age 21, when the 10-year rule takes over and the IRA must be depleted in the beneficiary’s 31st year.
Designated beneficiaries who are not EDBs. This category—often called nonEDBs—commonly includes adult children, grandchildren, nieces and nephews, and any nonspouse beneficiary who is more than 10 years younger than you are. They must empty the account by the end of the 10th year after the year of your death. If you die before your RBD, they may withdraw the IRA assets at any time within those 10 years. If you die on or after your RBD, they must also take annual RMDs in years one through nine. These RMDs are based on the single life expectancy of the beneficiary.
Nonperson beneficiaries. This includes your estate, a charity, or a trust that does not qualify as a “see-through” trust. If you die before your RBD, the account must be emptied by the end of the fifth year after the year of your death. If you die after your RBD, distributions may continue over your remaining single life expectancy.
Note: Because Roth IRAs are not subject to RMDs during the owner’s lifetime, beneficiary payments are always determined as if the owner had died before the RBD.
Don't Name a Trust on Autopilot
Some IRA owners name a trust as beneficiary simply because they went to a free estate planning seminar and were told that putting assets in a trust avoids probate. While this may be true, IRA assets also pass to named beneficiaries outside the probate process. Sometimes, however, naming a trust as a beneficiary may be the right call. When you want to leave assets to a loved one who is a minor, struggles with money, or has special needs, a trust may make sense. In other cases, a trust may add cost and complexity without a matching benefit.
The trust's terms control what the trustee can do. For example, the trust may require that distributions be paid straight through to the trust beneficiaries—or it may let the trustee accumulate assets in the trust. This difference can determine which payout rule applies and how much is taxed at the trust's higher income tax rate.
The New Trust Rule for IRA Custodians
Under the final RMD regulations issued in July 2024, the trustee of a trust named as an IRA beneficiary no longer needs to provide trust documentation to the IRA custodian. That relief comes with a tradeoff. Because the IRA custodian does not need to review the trust document, trustees of trust beneficiaries are largely on their own in deciding which payout rules apply. IRA custodians are not required to offer help. Some will direct trustees to seek qualified legal counsel; others will still work with trustees to sort through their options. Either way, someone must interpret the trust document you leave behind. If it is unclear, outdated, or poorly suited as an IRA beneficiary, your trustee and family may end up picking up the pieces.
Review After Every Life Event
A beneficiary designation stays in place until you change it, and your will does not override it. Review your designations after any significant life event.
- Marriage, so your new spouse is covered as you intend.
- Divorce, so an ex-spouse does not remain a beneficiary because you never updated the form. Some states automatically void previous spousal designations upon dissolution. But leaving an ex-spouse as a beneficiary will, at the very least, cause unnecessary confusion and delay.
- Births and adoptions, so new children or grandchildren are included.
- Deaths, so a deceased beneficiary is replaced or surviving beneficiaries receive your preferred allocation.
Also confirm you have named contingent beneficiaries. If no named beneficiary survives you, your IRA assets may go to your estate by default, triggering the probate process and possibly resulting in less favorable distribution requirements.
The Bottom Line
Every choice on your beneficiary form affects how your IRA assets are paid out. Choose carefully, review regularly, and work with a competent estate planning attorney and tax advisor so your designations and any trust you name work together. Mainstar Trust cannot give advice on the best way to accomplish your estate-planning objectives. But we can help you update your beneficiary designation forms and keep them current. Contact our SDIRA expertsto bring your forms up to date.