Outside the Box: We have two inherited IRAs, one for a spouse and one for adult children — can you help us figure it out?

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Q: My family is having difficulty with IRA RMDs and spousal continuation. Any insight on the following would be greatly appreciated. There are two qualified IRAs in my mother’s name (with my father as beneficiary) and one nonqualified IRA in my mother’s name (with my siblings and I as beneficiaries). My father is 72 and my mother recently passed away at 67. Dad is subject to RMDs but Mom was not. We are trying to get a handle on our options. Can you help?

A.: I am happy to try to help. First, my condolences on the loss of your mother.

Your use of the terms qualified, nonqualified, and spousal continuation suggest that you are dealing with annuity contracts. If that’s the case, there are two layers of rules to deal with. First is the type of account and second is the provision in each annuity contract. This added layer of complexity is one reason I am not a fan of using annuities in IRAs in most cases.

Option one for the IRA accounts, is for your dad to transfer your mom’s IRA funds into his IRA. Only a spouse as beneficiary can do this. There are no taxes on this transfer. Those assets are then treated as if they were always his. Therefore, because he is at that age, those funds would be subject to Required Minimum Distributions (RMD) on the same scale as his own IRAs.

This is a popular move due to its simplicity. However, because your mom was younger and not yet subject to RMD, there is another choice.

Your dad’s second option is to take your mom’s IRA accounts as a spousal beneficiary of an Inherited IRA. Doing this, your dad can wait to take RMD until the time your mom would have been subject to RMDs at her age 72. This is a smart choice when the added RMD from option one is less desirable.

Regardless of whether he selects option one or two, he then needs to understand what provisions in the underlying annuity contract affect him.

For what you are calling a nonqualified IRA it depends on if it is actually an IRA account or just a nonqualified annuity. If it is NOT an IRA and is just a nonqualified annuity, the annuity contract dictates what you and your siblings can do.

If it is an IRA, the rules for nonspouse IRA beneficiaries apply. She died this year so the new rules from the SECURE Act of 2019 apply. As far as the IRS is concerned, distributions can be made at any time in any amount, but the entire account would need to be distributed to the beneficiaries by the end of 2030.

Each distribution taken would be paid proportionately to each beneficiary unless you split the IRA into separate Inherited IRAs for each beneficiary. If the account is split (do this by Sept. 30 of the year after the year of death), each beneficiary can decide independently how much to take and when between now and 2030. The underlying annuity contract may not or may not make your desired distribution plan easy. Most beneficiaries in these cases have the option to surrender the annuity contract free of surrender charges. Proceeds are then invested per each beneficiary’s preferences.

This area of the tax code can be confusing and adding the extra layer of annuity rules can cause a mess. You should talk to your adviser about what can be done with these specific contracts.

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.

Dan Moisand is a financial planner with Moisand Fitzgerald Tamayo. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.