Can Inherited Annuities Be Cashed Out?

You'll have no trouble cashing in an annuity you inherited as the beneficiary on the contract. But, before you rush off and start buying everything, consider your annuity options and obligations. The most pressing concern will be the taxes you need to pay. The tax rules give you a choice of withdrawal options to spread out the tax burden.

Taxing Issues

Since the government doesn't tax inherited annuity gains, that pain falls on the non-spouse beneficiary. Only the money the annuity has earned since the original owner bought the contract will be taxable income to you. For example, let's say you're inheriting an annuity worth $150,000. The original premium paid for annuity was $100,000. If you cash it in, the $50,000 in earnings is taxable income.

Full Cash Out

You can ask for a check as soon as the insurance company backing the annuity verifies you're the listed beneficiary. The company will send you the surrender value of the contract. How long it takes to get the money depends on the insurance company's policies. Ask the company to withhold some for tax purposes, or be prepared to pay those on your own.

Take Your Time

The tax rules give you up to five years to withdraw everything from an inherited annuity. You could wait until the last day if you want, or you can pace out the withdrawals over several years. Some people do that to fit their cash needs or just to spread out the tax hit. Another reason to avoid an early withdrawal is any money kept in the annuity keeps drawing interest.

Lifetime Payments Options

You can also accept an annuity or lifetime income option from the insurance company. You'll need to take the first payment within one year after the original owner's death. The lifetime income spreads the tax burden over many years and leaves you with a monthly check. On the downside, you'll have no option to cash out.