3 Basic Options Inherited Qualified Annuity

What is an annuity?

Annuities are insurance contracts.

They’re an investment that can generate regular income payments that have certain guarantees from the insurance company.

Although there are different types of annuities, they fall into one of two camps, qualified or non-qualified.

Qualified Annuity: Contributions are pre-tax, and distributions are taxable income. If you withdraw funds before age 59½, there is a 10% penalty, and you must begin required minimum withdrawals when you turn 70½. Sound familiar? Yes, 401(k)s, 403(b)s, and IRAs can hold annuities.

Non-Qualified Annuity: Contributions are after-tax, but growth/earnings are tax-deferred. This results in a mix of taxable (earnings/growth) and nontaxable (contributions) distributions. Unlike the qualified annuity, there is no restriction on taking funds out before age 59½, nor are you required to withdraw funds after 70½.

Qualified Annuity Taxation

Qualified Funds are moneys eligible to be placed in tax deferred wealth accumulation vehicle that is approved by the IRS.

It is important to note that the money placed in one of these accounts must be earned income.

One of the major benefits of annuities is that the money that qualified money that is placed in an annuity is often subject to lower tax liability due to the fact that that it is tax deductible.

The distribution of income and the taxes paid are deferred until a later point in time, most often after the owner of the annuity has retired.

When a plan is “qualified,” it typically gives you the ability to either make tax-deductible contributions or enjoy tax-free earnings until you are ready to begin withdrawing.

Money within a non-qualified annuity accumulates on a tax-deferred basis. Regardless of how much the account value increases in a given year, no taxes are due. Instead, the growth continues to accumulate without tax until it is withdrawn.

3 Basic Options for an Inherited Annuity

If your spouse left you the annuity, you have several options open to you. You can treat the annuity as your own, retaining the same options that belonged to the original owner. If your choice is simply to continue the annuity, it minimizes the tax consequences. The options open to a non-spousal beneficiary are also open to you.

A non-spousal beneficiary has three basic options:

  • Accept a lump sum payment. This means that you must pay all owed taxes in a single year. The taxes owed amount to the same as with any other ordinary income, meaning you might have to pay as much as 35%.
  • Choose a five-year distribution. Chip away at the taxes owed as you take regular payments from the annuity. At first you must pay taxes on each payment that you receive from the annuity. However, with a non-qualified annuity, taxes were already paid on the original investment, so once you’ve received all the investment income, you don’t have to worry about paying taxes on anything after that. A five-year distribution is not an option for a tax-sheltered annuity. Equity-indexed annuity guarantees don’t experience volatility and you won’t experience a negative return, regardless of if the market took a dive that year or not.
  • Spread it out over your lifetime. With a non-qualified annuity, you must opt for this within 60 days. A part of each payment received is taxable. With a tax-sheltered annuity, you can set up an IRA so you receive payments over your lifetime. In this case, since taxes were not paid on the original investment, the entirety of each payment is taxable.

What is the best thing to do with an Inherited Annuity

Consider More Than Just Taxes.

Certainly, staying on the good side of the IRS while maximizing benefit to yourself is a prime consideration when handling an inherited annuity.

There is more that you need to take into account, however.

If the person you inherited the non-qualified annuity from died after the annuity start date, you are required to take the distributions at the same rate or a higher rate than did the deceased person.

This usually isn’t a big deal, since you can still go for the five-year option or a lump sum.

There is also the question of what to do with your inheritance.

If you’re already past the age of retirement, annuity payments can act as a great supplement to your income.

Younger people who inherit an annuity should seriously consider investing the money in their future.

Taking the time to speak with an investment advisor can help you make decisions that you can feel good about decades down the road.

Dealing with the death of a loved one is stressful enough with having to sift through complicated financial issues.

It is vital that you take your time, fully understand the situation, and make decisions based on your financial goals.


Mintco Financial Investment Advisors Inherited Qualified Annuity Advisor

At Mintco Financial we provide financial services and investment planning to individuals and businesses.

When you are ready to schedule a meeting, feel free to contact us through the website, email, or by phone.

Buffalo NY 716-565-1300

Tampa Florida  813-964-7100


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