Non-Qualified Annuity Beneficiary & Taxation
Non-qualified annuities offer individuals a way to save money for retirement that doesn't involve complex IRS rules and regulations concerning retirement plans. A non-qualified annuity is taxed differently than qualified annuities. Because of this, you should know how you're taxed on this money when you receive beneficiary payments or a lump sum amount from a non-qualified annuity.
Other People Are Reading
-
Significance
-
Non-qualified annuities only allow after-tax contributions. Because of this, the original account holder has always paid taxes on all of the investment principal in the annuity. However, the investment gains haven't been taxed yet. When you receive the proceeds of the annuity, the IRS requires you to pay these taxes.
Benefit
-
You may choose how to pay taxes on your inherited annuity. You may withdraw money from your annuity all at once or you may take payments over time. If you withdraw all of your annuity immediately when you inherit it, then you pay tax on all of the untaxed money you receive. If you elect to take payments over time, you only pay tax on the proceeds as you receive them.
-
Disadvantage
-
Even if the annuity you inherit invests in mutual funds, you don't pay capital gains tax on the inheritance. Instead, the IRS assesses income tax on the money you inherit. This is because the IRS considers annuity income to be ordinary income. Income tax rates may be higher than what you would pay if you had been allowed to pay capital gains tax rates.
Consideration
-
If the original account holder converted his savings to guaranteed monthly payments using an annuity, and you inherit the guaranteed monthly payments, you do not treat the proceeds the same way as if you had inherited the full savings. Do not include the distributions from a lifetime payment annuity until all distributions equal the cost of the contract (i.e. the original principal amount contributed by the original policyholder). All distributions beyond this point are fully taxable.
-
