What Is an Inherited Annuity?
An inherited annuity is a financial product that allows the beneficiary of an annuity contract to continue receiving payments after the annuitant's death.
Inherited annuities are often used to provide income for loved ones after the death of the primary breadwinner in a family.
Types of Inherited Annuity
There are two types of inherited annuities:
Immediate Inherited Annuities
Immediate inherited annuities begin paying out right away. Inherited annuities also come with different payment options, which include lump-sum, periodic payments, or a combination of both.
Deferred Inherited Annuities
Deferred inherited annuities allow the beneficiary to wait until a later date to start receiving payments.
What Is the Best Thing to Do With an Inherited Annuity?
The best thing to do with an inherited annuity depends on your financial situation and needs.
An immediate inherited annuity may be the best option if you need immediate income.
On the other hand, if you can wait a while before starting to receive payments, a deferred inherited annuity may be a better choice.
You will also need to decide how to receive your payments, which can be either a lump sum or periodically.
It is important to speak with a financial advisor before making any decisions about an inherited annuity, as they can help you determine what is best for your individual circumstances.
What Are the Risks of an Inherited Annuity?
There are a few risks to consider before investing in an inherited annuity.
It Is Not Guaranteed
First, you should know that the government does not guarantee inherited annuities like other retirement products.
This means that there is a chance that the payments you receive could stop if the insurance company that issues the annuity goes bankrupt.
It Is Complex
Second, inherited annuities are often complex financial products, making them difficult to understand.
Speaking with a financial advisor before investing in an inherited annuity is important to ensure you fully understand the risks involved.
Its Value Could Go Down
Finally, there is always the risk that the value of the annuity could go down, which would reduce the amount of money you receive in payments.
However, this risk can be minimized by investing in a high-quality inherited annuity from a reputable insurance company.
What Are the Benefits of an Inherited Annuity?
There are several benefits to investing in an inherited annuity.
Provides Beneficiaries a Source of Income
First, inherited annuities can provide a stable source of income for beneficiaries.
This can be especially helpful for loved ones relying on annuity payments to cover living expenses.
Helps Diversify Annuitant’s Portfolio
Second, inherited annuities can help diversify your investment portfolio, reducing your overall risk.
Offers Tax-Deferred Growth
Third, inherited annuities offer tax-deferred growth, which means you will not have to pay taxes on your investment growth until you start withdrawing.
Finally, inherited annuities come with a death benefit, which can provide financial security for your loved ones in the event of your death.
Rules for Inheriting an Annuity
If you are the beneficiary of an annuity, there are a few rules you will need to follow to inherit the account.
First, you will need to provide the insurance company with a copy of the death certificate for the annuitant.
Second, you will need to fill out a beneficiary form to specify how you want the payments to be made.
Third, you will need to provide the insurance company with other required documentation, such as a copy of the will or trust.
Fourth, depending on the type of inherited annuity and your personal tax situation, you may need to pay taxes.
Inherited Annuities and Payout Options
When you inherit an annuity, you must choose a payout option.
The most common payout options for inherited annuities are immediate and deferred.
With an immediate payout option, you will begin receiving payments right away.
However, the payments will be smaller than they would be with a deferred option because they will be based on the current value of the annuity.
With a deferred payout option, you will not begin receiving payments later.
This option allows the annuity to grow tax-deferred, which can result in larger payments down the road.
Inherited Annuities and Taxes
When you inherit an annuity, the taxation of the account will depend on the type of annuity and the payout option you choose.
If you inherit a traditional annuity, the payments you receive will be taxed as ordinary income.
However, if you inherit a Roth annuity, the payments you receive will not be taxed.
If you choose an immediate payout option, you will be taxed on the annuity's growth up to the date of inheritance.
However, if you choose a deferred payout option, you will not be taxed on the growth of the annuity until you begin taking withdrawals.
Speaking with a tax advisor before inheriting an annuity is important to ensure you understand the tax implications.
The Bottom Line
An inherited annuity can be a great way to provide financial security for your loved ones.
However, one must understand the risks and benefits before investing in one.
You will also need to follow the rules for inheriting an annuity and choose the right payout option to suit your needs.
Finally, be sure to speak with a tax advisor to ensure you understand the tax implications of inheriting an annuity.
FAQs
1. What is an inherited annuity?
An inherited annuity is an annuity that is passed down to a beneficiary upon the death of the annuitant.
2. What are the benefits of an inherited annuity?
There are several benefits to investing in an inherited annuity, including a stable source of income, diversification of your investment portfolio, and tax-deferred growth.
3. What are the rules for inheriting an annuity?
To inherit an annuity, you will need to provide the insurance company with a copy of the death certificate for the annuitant and fill out a beneficiary form. You may need to pay taxes depending on the type of inherited annuity and your personal tax situation.
4. What are the different types of inherited annuities?
There are two main types of inherited annuities: traditional and Roth. Traditional annuities are taxed as ordinary income, while Roth annuities are not taxed.
5. What are the tax implications of inheriting an annuity?
The taxation of an inherited annuity will depend on its type and the payout option you choose. If you inherit a traditional annuity, the payments you receive will be taxed as ordinary income. However, if you inherit a Roth annuity, the payments you receive will not be taxed. If you choose an immediate payout option, you will be taxed on the annuity's growth up to the date of inheritance. However, if you choose a deferred payout option, you will not be taxed on the growth of the annuity until you begin taking withdrawals.
