If you inherit an annuity, as a general rule you may roll it over into another qualified annuity fund without penalty. There are some exceptions to when and how you may do this. Typically, although there are no tax penalties for doing so, in some cases you may need to pay taxes on the funds that are rolled over. What you may do depends on your relationship to the deceased, the type of annuity, the type of plan into which you wish to roll it over and the timeliness of your actions.
A qualified annuity is an annuity that is approved by the IRS for certain tax benefits. These benefits typically transfer to the new owner when an annuity is inherited. Some of the annuities that fall into this category are 401(k)s and independent retirement accounts (IRAs). Any of these plans may be rolled over into a new plan, but there are some factors that must be considered when doing so.
If you inherit a qualified annuity from your spouse, you are allowed to treat it as your own. This means that you may leave it where it is and simply take over as the owner or you may roll it over into a new qualified annuity plan. If you choose to roll it over, as the spouse you are allowed to either roll it over into an existing plan of your own or choose to roll it over into a different qualified plan.
If you inherit a qualified annuity from someone other than your spouse, you are allowed to roll it over into another qualified annuity plan if you desire, but you must keep it in the name of the deceased person. The IRS says that you may not roll it over into an existing annuity of your own, but must at all times keep the inherited annuity separate from any other annuities you own. This includes inheritance by children of the deceased, other relatives and non-family members.
A non-Roth plan that is rolled into a Roth will be taxed as income at the time it is rolled over, since Roth funds are always after-tax funds. The advantage of this is that neither the funds nor their earnings are taxed at the time of distribution, normally resulting in a significant tax savings. Other types of plans may be rolled over without any taxes being due at the time of the rollover, provided they are placed in another qualified plan within 60 days of the date of the distribution of the funds. However, unless you do a direct rollover from one trustee to another, 20 percent of the funds may be withheld from the distribution for taxes and you will have to wait until you file your tax return to get these funds back.
- IRS.gov: Retirement Plans, Pensions, and Annuities
- IRS.gov: Pension and Annuity Income
- Internal Revenue Service. "Rollovers of Retirement Plan and IRA Distributions." Accessed April 21, 2020.
- U.S. Congress. "H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019." Accessed April 21, 2020.