Whether you can roll an inherited annuity into an IRA comes down to two facts: your relationship to the person who died, and whether the annuity was qualified or non-qualified. A surviving spouse can roll an inherited qualified annuity into their own traditional or Roth IRA. A non-spouse beneficiary can move a qualified annuity into an inherited IRA, but cannot put a non-qualified annuity into any IRA. Getting this wrong triggers tax on the entire balance, so identify your situation before any money moves.
Check Whether the Annuity Is Qualified or Non-Qualified First
Every inherited annuity is one or the other, and the category controls the rest of your options. A qualified annuity was funded with pre-tax dollars inside a retirement plan such as a 401(k), 403(b), or traditional IRA. Every dollar that comes out is taxable income. A non-qualified annuity was bought with after-tax money outside any retirement plan. Part of the balance is the owner’s original investment, which returns to the beneficiary tax-free, and part is accumulated earnings, which are taxed as ordinary income.
The original contract or the most recent annual statement will tell you which type you have. Language referencing an IRA, a tax-sheltered annuity, or an employer plan means qualified. Non-qualified contracts usually lack that language and may list a “cost basis” showing how much after-tax money was invested. If the paperwork is unclear, the insurance company’s customer service line can confirm the classification. Don’t start any transfer until you know the answer, because the paths diverge completely from here.
If You Are the Surviving Spouse
Spouses have the widest set of options. Under IRS rules, a surviving spouse can roll all or part of a distribution from a deceased employee’s qualified plan into a traditional IRA or a Roth IRA, using the same rollover rules that would have applied to the original owner.1Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income Once the money is in your own IRA, it is no longer an inherited account. You control the beneficiary designations, the investments, and the withdrawal timing from that point forward.2Internal Revenue Service. Retirement Topics – Beneficiary
For a non-qualified annuity, the tax code takes a different route. Instead of an IRA rollover, the surviving spouse is treated as if they were the original holder of the contract.3Office of the Law Revision Counsel. 26 U.S.C. 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts This “spousal continuation” keeps the annuity in force, preserves its tax-deferred growth, and lets you delay distributions. You cannot roll a non-qualified annuity into an IRA regardless of your marital status.
Watch the Early-Withdrawal Penalty Trade-Off
There is one catch to treating the account as your own. Distributions triggered by the account owner’s death are normally exempt from the 10% early-withdrawal penalty, but once you roll the funds into your own IRA, that death exception no longer applies.4Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions If you are under 59½ and expect to need the money before then, leaving the funds in an inherited IRA preserves the exemption and avoids the penalty.
If You Are a Non-Spouse Beneficiary
Children, siblings, friends, and other non-spouse heirs cannot roll an inherited annuity of either type into a personal IRA. Depositing the proceeds into a personal IRA is treated as a full taxable distribution followed by an excess contribution.
Qualified Annuity: Inherited IRA Transfer
If the annuity was held inside a qualified plan, a non-spouse beneficiary can do a direct trustee-to-trustee transfer into an inherited IRA, sometimes called a beneficiary IRA.5Office of the Law Revision Counsel. 26 U.S.C. 402 – Taxability of Beneficiary of Employees’ Trust The account title has to identify both the deceased owner and the beneficiary, such as “John Smith, deceased, for the benefit of Jane Smith.” Incorrect titling, or depositing the funds into a regular IRA, causes the IRS to treat the whole transfer as a taxable distribution, potentially pushing the amount into the top federal bracket of 37%.6Internal Revenue Service. Federal Income Tax Rates and Brackets
Most non-spouse beneficiaries then fall under the SECURE Act’s 10-year rule: the inherited IRA has to be emptied by December 31 of the tenth year after the original owner’s death.2Internal Revenue Service. Retirement Topics – Beneficiary If the original owner had already started taking required minimum distributions (the required beginning date is currently age 73), you also have to take annual distributions during those ten years.7Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) If the owner died before the required beginning date, no annual withdrawals are required as long as the account is empty by the end of year ten. A narrow group known as eligible designated beneficiaries, which includes disabled or chronically ill individuals, minor children of the deceased, and beneficiaries no more than ten years younger than the deceased, can still take distributions over their own life expectancy.
Non-Qualified Annuity: No IRA Route
Non-qualified annuity proceeds can’t go into any type of IRA. The tax code requires the entire remaining interest to be distributed within five years of the owner’s death, unless the beneficiary elects to receive payments spread over their own life expectancy beginning within one year of the death.3Office of the Law Revision Counsel. 26 U.S.C. 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The life-expectancy option can spread the taxable income across many years and keep you in a lower bracket. Not every insurance company offers it, so ask before defaulting to a lump sum.
The taxable portion of each distribution is the earnings above the original owner’s cost basis. The basis comes back to you tax-free; only the growth is taxed as ordinary income. Annuities don’t receive a step-up in basis at death.
The 1035 Exchange as a Substitute
When a non-qualified annuity can’t be rolled into an IRA, a 1035 exchange lets you swap the inherited contract for a different annuity tax-free. The new contract has to continue distributions at least as rapidly as the old one required, so the exchange can’t be used to stretch payouts beyond the original death-distribution rules. Ownership stays with the beneficiary, and no new contributions can be added. The move makes sense when the inherited annuity carries high fees, a poor crediting rate, or limited investment options. Not every insurance company accommodates inherited-annuity exchanges, so confirm with both the sending and receiving carriers before starting the paperwork.
How to Execute the Transfer Without Triggering Tax
A direct trustee-to-trustee transfer moves the funds straight from the insurance company to the new IRA custodian. No money touches your hands, and no taxes are withheld. If the insurance company instead cuts a check payable to you, mandatory withholding of 20% for federal taxes applies.8Office of the Law Revision Counsel. 26 U.S.C. 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income You then have 60 days to deposit the full distribution amount, including replacing the 20% out of your own pocket, into the new IRA to avoid tax on the withheld portion.9Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions Miss the 60-day window and the entire distribution becomes taxable income. Always request a direct transfer.
The steps from there are straightforward, though insurance companies are not always fast:
- Open the receiving account first. A spouse rolling into their own IRA opens a traditional or Roth IRA at the custodian of their choice. A non-spouse beneficiary opens an inherited IRA titled with both the decedent’s name and their own.
- Contact the insurance company and request a transfer form. Tell them you want a direct trustee-to-trustee transfer and give them the receiving custodian’s name, address, and your new account number.
- Gather the required documents. Expect to submit a certified copy of the death certificate, a government-issued photo ID, and possibly a Medallion Signature Guarantee, which is an authentication stamp from a bank or brokerage that verifies your identity and authority to transfer the assets.
- Confirm surrender charges. Many annuity contracts impose surrender charges that decline over time, but most waive them when the payout is triggered by the owner’s death. Verify with the insurer before assuming the waiver applies.
- Wait for processing. Transfers typically take two to six weeks. Once the funds arrive, the receiving custodian sends a confirmation statement showing the starting balance.
Handle the Year-of-Death RMD Before You Transfer
If the original owner had already reached the required beginning date and died before taking that year’s RMD, the beneficiary has to complete it. The deadline is December 31 of the year the owner died. Missing it triggers an excise tax of 25% on the amount that should have been withdrawn, reduced to 10% if corrected within two years. Ask the insurance company whether the owner had already taken the distribution for the year. No year-of-death RMD is owed if the owner died before the required beginning date.
Common Mistakes That Cost Money
The most expensive errors come from acting too quickly. Taking a lump-sum distribution from a large qualified annuity can push the entire amount into the 37% federal bracket in a single year, when spreading withdrawals over ten years might have kept each year’s income in the 22% or 24% range. Depositing inherited funds into a personal IRA instead of a properly titled inherited IRA is treated as a full distribution plus an excess contribution, a double tax problem. And cashing out a non-qualified annuity without asking about a life-expectancy payout or a 1035 exchange leaves money on the table.
If you’re the beneficiary of a non-qualified annuity and the insurance company sends you a check before you’ve chosen a distribution method, contact them immediately. Some insurers default to a lump-sum payout unless the beneficiary affirmatively elects another option within a contractual window, often 60 to 90 days after the death claim is filed. Once the money is distributed, the tax consequences cannot be undone.