Inherited Annuity Taxes: What You Need to Know

Inherited Annuity Taxes: What You Need to Know

Inheriting an annuity can offer financial security—but it often comes with a surprise: **taxes.** Understanding how inherited annuities are taxed is crucial for avoiding mistakes and making the most of your inheritance.

### 🧾 What Is an Inherited Annuity?

An inherited annuity is a financial product passed to a **beneficiary** after the original annuity holder dies. Whether you’re a **spouse, child, or other heir**, the IRS has specific rules on how you’ll be taxed.

### 💵 Are Inherited Annuities Taxable?

**Yes. ** Inherited annuities are subject to **income taxes**, but **not estate taxes** in most cases.

What you pay taxes on:

* **The gains** (earnings) in the contract
* Not the original investment (called the **cost basis**)
* Payout method (lump sum vs. installments) affects your tax bill

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### 👥 Spouse vs. Non-Spouse Tax Rules

#### ✅ Spouse Beneficiaries:

* Can **take over the annuity** contract
* Continue tax-deferred growth
* Avoid immediate taxation
* Option to **roll into their own IRA** if it’s a qualified annuity

#### 🚫 Non-Spouse Beneficiaries:

* Must begin distributions immediately
* Required to **withdraw full balance within 10 years** (SECURE Act rule)
* Taxes due when withdrawals are made
* Can’t roll into an IRA in their own name

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### ⚠️ Lump Sum or Periodic Payments?

Your tax situation depends on how you take the money:

| Withdrawal Option | Tax Impact |
| —————— | —————————————————- |
| Lump Sum | Immediate taxation on all gains |
| Periodic Payments | Spreads tax burden over several years |
| Annuitized Payouts | Blend of taxable earnings + tax-free return of basis |

Choosing the right withdrawal strategy is essential to minimize taxes.

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### 🧠 Pro Tips to Minimize Taxes

* **Consult a fiduciary advisor** before taking distributions
* Consider **installment payouts** to spread out tax liability
* Understand your **annuity type** (qualified vs. non-qualified)
* Watch for **state taxes** if applicable

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### 📌 Quick Definitions

* **Qualified Annuity**: Funded with pre-tax dollars (e.g., through a retirement account). Entire distribution is taxable.
* **Non-Qualified Annuity**: Funded with after-tax dollars. Only gains are taxed upon withdrawal.

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### 🤝 Don’t Go It Alone—Talk to a Fiduciary

Inherited annuities are complex. Making the wrong tax move could cost you thousands. The right advice can protect your inheritance and your financial future.

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### 💬 Work with Mintco Financial—Serving Clients Nationwide

 

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