Inherited Annuity: What Are My Options?

Shawn Plummer

CEO, The Annuity Expert

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.

Why you can trust The Annuity Expert

At The Annuity Expert, we strive to help you make confident financial decisions regarding annuities. Content provided is created by an independent licensed financial professional.

The Annuity Expert is an online insurance agency that provides the widest variety of annuities in the United States. When you buy an annuity directly from us, we receive a predetermined commission from the insurance company (not you). While your annuity is active, clients are not charged any servicing or management fees. Learn more.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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