What Is the 'Step into the Shoes Rule' for RMDs?

Barbara Webb

Determining how assets must be disbursed from retirement accounts after a participant’s death can be quite complex. There is a specific date by which required minimum distributions (RMDs) must commence, and a particular formula used to calculate the minimum amount that is based on a life expectancy factor, or the “distribution period.” But before that, it is necessary to determine the designated beneficiary, which is not always apparent.

In order to be a designated beneficiary, an individual must be a beneficiary as of the date of the participant's death. For purposes of determining the distribution period for death distributions, the designated beneficiary is determined based on the beneficiaries who remain beneficiaries as of Sept. 30 of the calendar year following that in which the participant dies — we’ll call that the determination date.

Certainly spouse beneficiaries have more options than other individuals or entities in all aspects of the RMD process, even upon the surviving spouse’s death!

There is a special rule that applies when a spouse beneficiary dies after a participant not yet in RMD status, but before death distributions are required to have begun to the surviving spouse, even if distributions have been made before this date. (Death distributions to the surviving spouse beneficiary are not required to commence until Dec. 31 of the calendar year in which the original participant would have attained the age of 70½ had he or she lived.)

In this case, the surviving spouse “steps into the shoes” of the original participant in determining the distribution period after the spouse’s death. Generally, when a subsequent beneficiary inherits a retirement plan from an “original” beneficiary, they may not consider a life expectancy factor other than that derived from the original beneficiary. However, in this situation, the surviving spouse's date of death is substituted for the participant's date of death.

Thus, the relevant designated beneficiary for determining the distribution period is the designated beneficiary of the surviving spouse. Such designated beneficiary of the surviving spouse is determined by Sept. 30 of the calendar year following that in which the spouse dies. The 5-year rule and the life expectancy rule start all over again with respect to the surviving spouse beneficiary’s subsequent beneficiary(ies). If, as of this date, there is no subsequent designated beneficiary, distribution of the entire remaining account must be made in accordance with the 5-year rule.

Let’s look at an example:

Jean would have attained age 70½ in the year 2020. She passed away in 2014. The sole beneficiary of Jean’s IRA is her husband, Pete. If Pete dies before Dec. 31, 2020, (the end of the year when Jean would have attained the age of 70½ had she lived), Pete “steps into the shoes” of Jean for determining the distribution period. Any subsequent beneficiary is determined by Sept. 30 of the calendar year following the calendar year of Pete’s death.

Let’s assume that Pete dies during 2016. On Pete’s date of death, Misty and Meagan are his subsequent beneficiaries.

If Misty and Meagan establish separate accounts by Dec. 31, 2017, Misty can use her own single life expectancy and Meagan can use hers for determining the RMDs to Misty and Meagan in 2017.

In this example, the 5-year rule and the life expectancy rule start all over again as of Pete’s date of death. Again, if Misty and Meagan establish separate beneficiary accounts by Dec. 31, 2017 (the end of the year following the year of Pete's death), each daughter can use her own life expectancy. Thus, the RMD from Misty’s beneficiary account is calculated using Misty’s single life expectancy determined in the calendar year following that in which Pete dies. Misty’s single life expectancy is then reduced by one year for each year that lapses.

Likewise, the RMD from Meagan’s beneficiary account is calculated using Meagan’s single life expectancy determined in the calendar year following the calendar year in which Pete dies. Meagan’s single life expectancy is then reduced by one year for each year that lapses.

Some additional considerations:

• If the beneficiary of the original surviving spouse is the new spouse of the surviving spouse, this spouse cannot wait until the original surviving spouse would have attained the age of 70½ to commence death distributions. Such new spouse is treated as a non-spouse beneficiary for commencing distributions under the life expectancy rule.

• Furthermore, the new spouse cannot roll over to his or her own IRA, since this individual was not the spouse of the original plan participant. However, the original surviving spouse of the plan participant could roll over into an IRA in their own name, designate their new spouse as beneficiary, and such new spouse would then be treated as a surviving spouse for all purposes.

Barbara Webb, TGPC, of PenServ Plan Services, Inc., is a member of the NTSA Communications Committee.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.