By: Denise Appleby, MJ, CISP, CRC, CRPS, CRSP, APA

The Ghost Rule and other important factors for non-person IRA beneficiaries.

When advising beneficiaries of distribution options for their inherited IRAs and employer plans (retirement accounts), one must know the category under which the beneficiary falls. Is the beneficiary a non-designated beneficiary? A designated beneficiary? Or an eligible designated beneficiary? The answer determines the pace at which the beneficiary must take distributions and whether they can roll over inherited employer plan accounts. In this article, we focus on non-designated beneficiaries.

What is a non-designated beneficiary?

To answer the question “What is a non-designated beneficiary?” we must first know “What is a designated beneficiary?”

A designated beneficiary is a person.

A beneficiary that is not a person is not a designated beneficiary. For the purpose of this article, we refer to such beneficiaries as non-designated beneficiaries. Examples of non-designated beneficiaries include estates and charities.

Please note: A see-through trust is a designated beneficiary for required minimum distribution (RMD) purposes. Trust beneficiaries are outside the scope of this article.

The distribution options for a non-designated beneficiary

The distribution option for a non-designated beneficiary depends on whether the participant died before their required beginning date (RBD). The required beginning date is April 1 of the year following the year in which the participants attained their applicable age, which is the year for which their first required minimum distribution (RMD) is due.

The applicable age is determined by the participant’s date of birth in accordance with the following schedule:

  • For participants born before July 1, 1949, the applicable age is 70 ½,
  • For participants born on or after July 1, 1949, but before January 1, 1951, the applicable age is 72,
  • For participants born on or after January 1, 1951, but before January 1, 1959, the applicable age is 73,
  • For participants born in 1959, the proposed applicable age is 73*, and
  • For participants born on or after January 1, 1960, the applicable age is 75.

*The SECURE 2.0 Act is ambiguous regarding the applicable age for participants born in 1959. The proposed regulations for SECURE 2.0 define the applicable age for participants born in 1959 as 73. This rule might change when the regulations are finalized.

More SECURE Act 2.0 Changes: What 2025 Brings to Retirement Planning

Special rule for employer plans: An employer plan may provide that an employee’s applicable age is past the ages listed above until the year the employee retires from working for the employer. Beneficiaries should check with the administrator of an inherited employer plan account or benefit regarding whether the participant died before their RBD.

Death before the RBD-traditional and Roth account

If the participant dies before their RBD, the 5-year rule applies. Under the 5-year rule, distributions are optional until the 5th year after the participant’s death, when any remaining balance must be distributed.

Because there is no RMD for Roth IRA owners and—as of 2024, designated Roth accounts (DRA), this 5-year rule applies to such accounts regardless of the age at which the participant dies.

Death on or after the RBD—traditional accounts and DRAs inherited before 2024

If the participant dies on or after their RBD, distributions must be taken annually over the decedent’s remaining single life expectancy. The decedent’s life expectancy is colloquially called the Ghost Rule (a term I heard first used by Robert S. Keebler) because it uses the life expectancy of someone who is dead.

This rule applies to traditional accounts, not Roth IRAs. It also applies to DRAs inherited before 2024.

When a person is treated as a non-designated beneficiary for RMD purposes

When a retirement account’s only beneficiary is a non-designated beneficiary, the rules are straightforward—that beneficiary is subject to the RMD rules explained above under The Distribution Options for a Non-designated Beneficiary. However, complexity is added when a person shares beneficiary status with a nonperson.

While a person is generally a designated beneficiary, a retirement account is treated as not having a designated beneficiary if the person shares beneficiary status with a nonperson. This non-designated beneficiary status for the person can be changed if the nonperson beneficiary properly disclaims or takes a full distribution of its share by September 30 of the year that follows the year the retirement account owner dies. Beneficiaries should consult with their estate planning attorneys regarding eligibility to make disclaimers.

Example 1

65-year-old James died in 2024, leaving his daughter Suzanne and a charity as primary beneficiaries of his IRA to be split 50/50.

If the charity distributes its full share by September 30, 2025, the IRA will have a designated beneficiary, and Suzanne will be able to take distributions under the 10-year rule.

If the charity does not fully distribute its share by September 30, 2025, Suzanne must take distributions under the 5-year rule because the account would be treated as not having a designated beneficiary.

Example 2

75-year-old Janet died in 2024, leaving her son Gary and a charity as primary beneficiaries of his IRA to be split 50/50.

If the charity distributes its full share by September 30, 2025, Gary will be able to make distributions under the 10-year rule. Gary must also take annual RMDs over his single life expectancy.

If the charity does not fully distribute its share by September 30, 2025, Gary must take distributions over Janet’s remaining single life expectancy.

You must ask a person if they are the only beneficiary

In the examples above, Suzanne and Gary must each transfer their share of their inherited IRAs to their own beneficiary IRAs. If you advise either of these beneficiaries about their distribution options, you must confirm whether each is the sole beneficiary or one of multiple beneficiaries for the IRA they inherited. If a person shared beneficiary status with a nonperson, you must also confirm whether the nonperson beneficiary withdrew (or disclaimed if eligible to do so) their share by the September 30 deadline.

The beneficiary’s confirmation helps you provide accurate information about their distribution options. Otherwise, your advice could be incorrect. For instance, if you assume that Suzanne is subject to the 10-year rule because she is a person and advises her accordingly, your advice would be incorrect if the charity did not meet the September 30 deadline. As a result, Suzanne will have RMD shortfalls if she does not withdraw any remaining balance by the end of the fifth year.

RMD shortfalls are subject to a 25% excise tax (reduced from 50% as of 2023).

No rollovers allowed

Assets moving from a decedent’s retirement account to the beneficiary’s account must be moved as a nonreportable transfer. This nonreportable movement means no tax forms would be issued, and the transfer would not be reported on the beneficiary or the decedent’s tax return.

Distributions taken by a non-designated beneficiary- whether from an inherited IRA or inherited employer plan account- cannot be rolled over.

Pre-death planning consideration

Many employer plans do not allow non-designated beneficiaries to keep inherited accounts under their plans. For example, the RMD regulations give a non-designated beneficiary 5 years if the owner dies before the RBD, to fully distribute an inherited 401(k). However, the terms of the plan might require the non-designated beneficiary to fully distribute the inherited 401(k) within a few months after the participant’s death.

IRAs are usually more estate-planning friendly, allowing distributions to be taken over the period available under the RMD regulations, the 5-year rule and the decedent’s remaining life expectancy.

If you have savings in an employer plan- such as a 401(k), check the summary plan description (SPD) to determine the distribution options available to your beneficiaries. The plan administrator can help you interpret any complex and unclear provisions. If the plan’s options are more restrictive than the RMD regulations, the participant can roll over eligible amounts to an IRA and designate the beneficiaries for that IRA.

A retirement account owner should have an estate planning attorney who is an expert on the RMD regulations and review their beneficiary designations as a part of their operable state planning.

Source: Horsesmouth, LLC
Horsesmouth, LLC is not affiliated with Lane Hipple or any of its affiliates.