Advice on Inherited Qualified Annuity and Taxes

[erkevin]

My wife inherited a 10 year qualified annuity in 2023 with a current value of $185,000. My understanding is that we have 9 years remaining to empty the annuity. There are no options for rollover or anything to avoid a taxable event in the coming nine years. At this point, we absolutely do not need the money and the investments in the annuity are doing very well (mainly US equities). However, I am thinking that taking a chunk now (maybe $30-$40k) may be a good idea; the Tax Cut act under Trump expire at the end of next year and the market has done so well, take some profits. If we take $40k now, it all remains in the 22% tax bracket. Next year, re-evaluate and if the market is still doing well, take another chunk before the tax brackets re-set. (Taking $40k now, only saves about $1200 in taxes by beating the 3% increase in 2026.) Another consideration is if we wait and are forced to take really large chunks in a few years, we will have some of those funds taxed at 28%. I would appreciate any thoughts or advice. Thank you. Edit: another consideration, we receive an ACA subsidy of $500/month. Adding $40k in income will result in a $3400/yr premium increase, killing any tax benefit.

 

[target2019]

We inherited 3, and had 5 years to cash in. So I projected income out 10 years, and made choices.

Ours had various taxable computations too.

 

[erkevin]

After my edit in my original post, I think I am back to square 1. Unless I am missing something, I should wait until the ACA premium subsidy ends for us (Dec, 2025) (but is also the date of the tax bracket re-set.) mmmmmmm?

 

[pb4uski]

Do you know what the decedent's basis was? IOW, not all of the $185k value would be taxable, just the growth. The annuity provider should be able to tell you what the decedent's basis was.

 

[Sunset]

Do you know what the decedent's basis was? IOW, not all of the $185k value would be taxable, just the growth. The annuity provider should be able to tell you what the decedent's basis was.

Do all annuities pay out the interest (fully taxable ) first and then the basis ?

In this case if the decedents basis is over $185K , would it all be tax free return of basis ?

 

[erkevin]

Qualified Annuity was from a 401k rollover (pre-tax). It is 100% taxable upon liquidation at income tax bracket rates. Some other info: I am 60 years of age. 85% of social security will be taxed, whenever I take it, due to pension and interest income. The annuity won't impact that number. IRMMA may be a concern if I take large lump sums from the annuity after age 65

 

[target2019]

$20,555 per year. Some years more, some less? It's like a Roth conversion on steroids.

 

[erkevin]

$20,555 per year. Some years more, some less? It's like a Roth conversion on steroids.

But without the benefit of the funds then being in a tax-free account going forward

 

[target2019]

But without the benefit of the funds then being in a tax-free account going forward

I focused on the 3% earned each year in those annuities. Since 0% was the standard, I admired what the in-laws had chosen.

The additional cash helped with vacations, a wedding, and so on.

Enjoy!

 

[pb4uski]

Do all annuities pay out the interest (fully taxable ) first and then the basis ?

In this case if the decedents basis is over $185K , would it all be tax free return of basis ?

Life annuities do not. For non-qualifed life annuities (outside a tax-deferred or tax-free account) the benefit payments are part non-taxable principal and part taxable income. I suspect the same is true of non-qualifed period certain payout annuity benefit payments.

Deposit type annuities like a MYGA and others are income first and then principal.

 

[erkevin]

OP Here: The Payout/income date of my wife's annuity is December of 2059

 

[all4j]

An additional consideration is the tax implications of the growth of the $s. Other info would be needed to make a more definitive compare, but remember an annuity may be a product for converting qualified dividends & long term capital gains into ordinary income. Funds available inside an annuity usually won’t perform quite as well as similar funds on the open market. But, for example, assume you have 2 equity funds that return 8% per year, with the 8% being composed of 2% qualified dividends & 6% price appreciation. Once outside the annuity, the cap gains, which is most of the return, would only be taxed if/when sold. But growth would be on a smaller base (since tax paid sooner rather than later). There are other impacts, but hopefully this gives you food for thought.