Determining tax consequences of an inherited annuity

[rwdflynavy]

My DW inherited an annuity when my MIL passed away. I know the total value is about $42K. We asked for info about the annuity and all the company sent us was that our Cost Basis is about $9.4K.

We have the very first world problem of managing our total income to keep us eligible for Roth IRA contributions and I want to ensure we don't go over the $218K amount after which eligibility for Roth contributions declines.

From this limited info can anyone tell me what portion will count as AGI for taxes if we take the entire amount this year? I'm hoping it is just the $9.4K, but I'm not sure.

Appreciate any assistance!

 

[Goatfan]

You are probably going to pay taxes on $32,600. You take the amount minus the cost basis. Here is more information.
https://www.stantheannuityman.com/l...ou're cashing,calculated from that cost basis.

 

[COcheesehead]

Pretty detailed explanation of inherited annuities and taxation.

https://canvasannuity.com/blog/inherited-annuities

 

[njhowie]

Sorry for your loss.

We went through this for mom about 5 months ago. Goatfan is correct. You will pay taxes on what the gain is from MIL's purchase price.

We were given the option of taking the payout as an annuity over time or lump sum. We took the lump sum to have it all resolved in 2023 tax year. If you are able to take the payout over a number of years, maybe 10, this may alleviate some of your potential problem.

When you complete the claim forms, it will give the options of how you want the payout and ask how you want to handle taxes - they can withhold Fed and State taxes from the distribution(s). I would recommend doing this, at approximately what your Fed/State tax rate is. We had them hold 15% for Fed and 5% for state. This way we won't have any surprise amount due come tax time, and it wouldn't raise any red flags along the way.

The insurance company provided a summary letter with the check, and I assume they will send appropriate tax form in time for filing 2023 taxes. If not, their letter provides the taxable amount and how much was withheld.

 

[walk]

You can make a backdoor roth IRA contribution at any income level. White Coast Investor has some of the specifics about how to do it and how to fill out form 8606 on your taxes: https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/