Tax Consequences to the Annuity Beneficiary
Original post by Gregory Gambone of Demand Media
If you or your spouse own an annuity, or if you are the beneficiary of one, you must familiarize yourself with the various income tax consequences of the different death benefit payout options. Not all payout methods are available to all beneficiaries, as the most flexibility is given to the owner's spouse. However, an annuity owner's spouse is not obligated to choose the payout methods reserved only for spouses. The spouse can instead pick any of the other options offered to non-spousal beneficiaries.
Continuation of the Contract
If you are the beneficiary of your spouse's annuity, one of the options you have is to continue the contract in your own name. Upon your spouse's death, the insurance company can re-title the account into your name, allowing you to maintain its tax-deferred status. Taxes are not due at the time of the transfer, and the contract will continue with existing applicable retirement withdrawal rules. The option to continue an annuity as your own is only available if your spouse was the contract owner.
Immediate Lump Sum
Annuity beneficiaries may choose to take the proceeds of the contract as a single lump sum. This election results in an immediate increase in your taxable income for that year. The entire amount of the proceeds paid to you as a lump sum are considered taxable earnings.
Five-year Payout Plan
Annuity beneficiaries may choose to have their portion of the death benefit proceeds paid out over the course of five years. The insurance company will arrange equal and systematic payments on a regular basis so the entire balance of the account is paid out in five years. The portion of the annuity received during the year is added to your taxable income, while the remainder continue to accumulate tax-deferred.
Annuitization is the beneficiary payout option with the smallest tax consequences. This choice converts the entire balance of the annuity into a steady stream of recurring payments. The amount of the payments depends on the original contract owner's age as payments will be calculated based on the owner's life expectancy. Only the amounts you receive in a given year are added to your taxable earnings.
- Internal Revenue Service: Retirement Topics -- Beneficiary
- ImmediateAnnuities.com: Annuities and Your Spouse as Beneficiary of Your IRA
- Smart Money; What's Wrong with Variable Annuities; August 2010
- FreeAnnuityRates.com: Annuity Beneficiary Help
- Producers Web; Who's Your Beneficiary?; Paul Cross; April 2011
About the Author
Gregory Gambone is Senior Vice President of a small New Jersey insurance brokerage. His expertise is insurance and employee benefits. He has been writing since 1997. Gambone released his first book, "Financial Planning Basics," in 2007 and continues to work on his next industry publication. He earned a Bachelor of Science in psychology from Fairleigh Dickinson University.