Are inherited annuities taxable? I will be receiving an inherited annuity. What’s the best way to handle this large sum of money? This guide will provide you with a few options on how you can efficiently inherit the death benefit.
Qualified Vs. Nonqualified Death Benefits
- Qualified Inherited Annuities = All of the death benefits will be subject to taxes.
- Nonqualified Inherited Annuities = Only the interest earned will be subject to taxes.
Nonspousal Inherited Annuity
If you’re a non-spousal beneficiary, you may have the option to transfer the death benefit amount into a new inherited annuity. This method will provide a way to spread your tax liability while allowing the inheritance to continue growing.
The Benefits
Continuing the annuity’s growth
Transferring the death benefit into an inherited annuity, your assets may continue to grow, which can provide a significant boost to your inheritance over time.
Spread income tax impact over time
Collecting the death benefit as a lump sum payment could leave you with a significant tax burden. However, utilizing an inherited annuity, your money will not be taxed until you make a withdrawal.
Designating your own beneficiaries
With a new inherited annuity contract, you will be able to name a new beneficiary in case of your premature death.
Spousal Inherited Annuities
The same options apply to spousal inherited annuities, but with one additional option, spousal continuance. Spousal continuance will allow the surviving spouse to continue the deceased’s annuity and avoid paying taxes at the time of death. Any withdrawals from now on will be subject to ordinary income taxes.
Things To Know
- In many cases, the IRS requires the first payment from an inherited IRA to be made by December 31 of the calendar year following the owner’s death. The first payment from an inherited non-qualified annuity must be made by the first anniversary of the owner’s death.
- If the death benefit is paid directly to you, a new inherited annuity will no longer be an option. If you decide to open an inherited annuity, the death benefit will need to be transferred to another insurance company that will accept inherited annuity funds.
- In many cases, the IRS requires you to withdraw a minimum amount each year. This is called Required Minimum Distributions (RMD) for an inherited IRA or a 72(s) payment for an inherited non-qualified contract. In some cases, a final distribution must be made from an inherited IRA annuity after 10 years.
Related Reading
- Annuitant vs. Beneficiary: What’s The Difference?
- Primary vs. Contingent Beneficiary: What’s the Difference?
- What Happens To A 401K When You Die?
- The Annuity Death Benefit Guide
- Annuities that offer a Death Benefit to Beneficiaries
- How To Avoid Paying Taxes On An Inheritance
- The Best Annuity Death Benefits
- What is Spousal Continuance?
- How to Retire on $200,000 Inheritance
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