Ask an Advisor: How Does Inheriting an Annuity Work? Can I Roll the Funds into My IRA?

Post Content

Brandon Renfro

5 min read

My husband has an annuity that he has not rolled into an IRA. If I inherit this annuity, does it work the same as if he had an IRA? Can I roll the funds into my IRA. We are both retired and are in our early 80s. – Carol

No, you wouldn’t be able to roll your husband’s annuity into your IRA. Depending on the type of annuity, there are situations where this could be allowed due to your relationship, but not in the situation you are describing.

A financial advisor can help you manage your retirement assets and make decisions around rollovers and Roth conversions. Connect with an advisor for free.

Annuities, regardless of type, are categorized as either qualified or non-qualified based on how they are funded. If an annuity contract is purchased within a tax-advantaged retirement account, such as a traditional IRA or 401(k), it is considered a qualified annuity. If the annuity is purchased with after-tax dollars outside of a retirement account, it is classified as non-qualified.

In other words, the term “qualified” doesn’t describe the annuity contract itself as much as it describes where the money came from. A fixed annuity, variable annuity or indexed annuity can all be qualified or non-qualified depending on whether it was funded with IRA/401(k) dollars or funded with after-tax dollars.

You said he has not rolled this money into his IRA, so I’m assuming that means he purchased an annuity with other money and it is non-qualified.

Non-qualified annuities cannot be rolled into an IRA, just as stocks held in a taxable brokerage account cannot. The underlying reason is that non-qualified annuities are purchased with after-tax dollars and are not housed within retirement accounts. As a result, the IRS does not permit these assets to be converted into IRA funds through a rollover. (And if you need help deciding whether an annuity belongs in your retirement plan, speak with a financial advisor.)

SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.

If you inherit a non-qualified annuity, the annuity doesn’t “turn into” an IRA. Instead, it continues to be treated as an annuity contract with its own rules and tax structure.

This also affects how it’s taxed. Typically, only the gains in the annuity are taxable. The original premium paid into the contract is not taxed again. However, distributions are generally treated as coming from earnings first, meaning the taxable portion often comes out before the tax-free portion.

Also, once the contract is inherited, you may be required to take distributions under a certain schedule. It depends on the terms of the annuity contract and IRS rules. Some annuity contracts require distribution within a certain time period after the owner’s death, and some provide options for stretching payments.

While an inherited annuity can continue to generate income, it does not function in the same manner as an inherited IRA. (Consider working with a financial advisor if you have additional questions about inheriting an annuity or IRA.)

If your husband held a qualified annuity, the situation would be different. Because qualified annuities are owned inside retirement accounts, they generally follow the same inheritance and distribution rules that apply to IRAs.

Spousal beneficiaries are treated differently under the tax code. A surviving spouse may roll an inherited IRA, including a qualified annuity inherited from a spouse, into an IRA in their own name.

This offers several benefits. First, it simplifies administration. Once rolled into your own IRA, you no longer have to treat the account as an inherited asset. You can manage it like your other retirement accounts.

Second, it may help with required minimum distributions (RMDs). Since you are already in your early 80s and taking RMDs, this may not dramatically change your situation, but rolling it into your own IRA may allow the account to be combined with your other IRA assets and managed more efficiently.

Non-spouse beneficiaries do not have the option of rolling it into an IRA in their own name.

Unless the annuity is a qualified annuity, meaning it is already held within a retirement account, you can’t roll it into your own IRA.

If your husband’s annuity is non-qualified, inheriting it will not give you the same rollover options you would have if you inherited his IRA. Instead, you would need to follow the distribution and tax rules that apply to inherited non-qualified annuities.

Before making any decisions, it may be worth confirming whether the annuity is qualified or non-qualified by reviewing the contract paperwork or asking the issuing company directly. That one detail determines a lot, so it’s important to get it right.

A financial advisor can help translate goals into a coordinated strategy that addresses investments, taxes, withdrawal planning and risk management. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
As earnings rise, gradually raising retirement contributions can prevent lifestyle inflation from crowding out long-term saving. Even small percentage increases over time can meaningfully improve future income potential.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.

The post Ask an Advisor: How Does Inheriting an Annuity Work? Can I Roll the Funds into My IRA? appeared first on SmartReads by SmartAsset.

Terms and Privacy Policy