How to cash out an inherited annuity?
You can cash out an inherited annuity by contacting the issuing insurance company to submit a death claim form alongside an official death certificate.
š Cash-Out & Payout Options
- ā ļø Lump-Sum Withdrawal: Takes the entire balance at once, but triggers a massive single-year ordinary income tax bill on all accumulated gains.
- š 5-Year Rule (Non-Qualified): Requires full withdrawal by December 31 of the fifth year following death, spreading out the tax hit.
- š 10-Year Rule (Qualified/IRA): Mandates complete distribution within ten years for most non-spouse beneficiaries under the SECURE Act.
- š Spousal Continuation: Allows a surviving spouse to assume ownership of the contract and continue tax deferral.
š” Tax Impact & Hidden Costs
- No Step-Up in Basis: Inherited annuities do not receive a step-up in basis; earnings are taxed as ordinary income.
- Qualified vs. Non-Qualified: Qualified annuity distributions are 100% taxable, while non-qualified ones tax only the growth/earnings above the original cost basis.
- Surrender Charges: Check if the original contract still has active surrender periods, though many waive these upon the owner's death.