The inheritance of an annuity may affect your Social Security payments depending on what kind of benefits you receive. The Social Security Administration (SSA) uses varying formulas to calculate what benefits are due to you. And during the calculations, it may factor in your resources or income to varying degrees. So, it helps to understand how your Social Security benefits are calculated and what influences the amounts you earn.
Social Security Retirement Benefits
If you are a U.S. citizen or legal alien who pays Federal Insurance Contributions Act (FICA) taxes, you have a right to Social Security income during your retirement. But you must earn at least 40 social credits over 10 years or more to be eligible for these benefits.
The amount you receive depends on the age at which you begin accessing the benefits and the amount of taxes you paid based on 35 of your highest-paying years. The more money you earn and the longer you wait to access your Social Security benefits, the more income you will get in retirement – up to a point.
If you begin accessing your Social Security income after reaching the minimum required age, inheriting an annuity will not affect it directly. That is because the benefits are based on what you put into the system. However, inheriting an annuity can increase the rate at which your Social Security retirement income is taxed because the annuity earnings are taxable income.
If you earn a combined annual income of $25,000 and $34,000 as an individual or $32,000 and $44,000 as a couple, up to 50 percent of your Social Security benefits could be taxable. But if you earn more than $34,000 as an individual or $44,000 as a couple, up to 85 percent of your benefits could be taxed. So, you need to watch out for those annuity payments.
Social Security Disability Insurance
Social Security Disability Insurance (SSDI) benefits are earned just like their retirement counterpart. To qualify for these benefits, you must have made a specified number of social credits and meet the disability criteria SSA has set.
Depending on the age at which you become disabled, SSDI may require anywhere from six to 40 social credits. These may be earned by working at least three to 10 years. However, it is the disability criteria that affect the amount of money you can make.
For you to qualify for SSDI, you must have a disability that prevents you from earning more than $1,310 each month. Anything more, and you will not be eligible for the disability benefits. That said, SSA makes a distinction between earned and passive income.
Since annuity payments are passive income, you can inherit an annuity and not have to worry about your Social Security payments.
Supplemental Security Income (SSI)
Like Social Security retirement and annuities, SSI and inheritance are not always compatible. That is because the Supplemental Security Income program is needs-based. Your ability to access SSI benefits depends largely on how “needy” you are. You must not only have a low income, but you must also have limited resources.
Typically, SSA considers what is known as countable resources. These include anything you can convert into cash, such as bank accounts and bonds. If you are an individual, your countable resources should be $2,000 or less. For couples, your resources cannot exceed $3,000.
So long as the state did not pay your inherited annuity to a veteran or due to a disability, it counts as unearned income for SSI calculation purposes. The more income you receive beyond your countable resources, the more your SSI benefits will reduce. And if your inherited annuity payments are quite high, you may end up losing your SSI benefits altogether.
Also, you need to remember that Medicaid is oftentimes linked to SSI. So, if you are no longer eligible for SSI, your ability to access Medicaid services may be put in jeopardy.
The inheritance of an annuity may affect Social Security payments. But that is not always a bad thing if the annuity payments are significant and can offset all your costs. So, before you panic at the thought of losing your Social Security benefits, sit down and do the math first. With the help of a lawyer or financial advisor, you could keep the inherited annuity and Social Security benefits with minimal legal consequences.
- SSA.GOV: What is FICA?
- SSA.GOV: Social Security Credits
- Annuity.Org: Annuity Beneficiaries: Death Benefits & Payout Options
- SSA.GOV: Income Taxes And Your Social Security Benefit
- SSA.GOV: Disability Benefits
- SpecialNeedsAlliance.Org: Work History Requirements for Social Security Disability Insurance
- SSA.GOV: Disability Benefits | How You Qualify
- CBPP.Org: Introduction to the Supplemental Security Income (SSI) Program
- SSA.GOV: SPOTLIGHT ON RESOURCES -- 2021 Edition
- SSA.GOV: § 416.1124. Unearned income we do not count.
- SSA.GOV: § 416.1121. Types of unearned income.
- LegalZoom: SSI and Inheritance
- SSA.GOV: Understanding Supplemental Security Income SSI and Other Government Programs -- 2021 Edition
I have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.