Inheriting an annuity means stepping into a contract the deceased already set up with an insurance company, and the rules you’ll follow depend on three things: whether the annuity is qualified (held inside an IRA or employer plan) or non-qualified (bought with after-tax money), whether you were the owner’s spouse, and what the contract itself says. The named beneficiary collects directly from the insurer without going through probate, but the money comes with a distribution deadline and a tax bill on the gains.
Who Actually Receives the Money
The beneficiary listed on the annuity contract controls who inherits — not the owner’s will. Annuity proceeds transfer directly to that person and bypass probate. A will written later cannot override the designation on file with the insurer.
Most contracts allow a primary beneficiary and a contingent beneficiary who inherits only if the primary has already died. If no beneficiary is named, or every named person predeceased the owner, the payout defaults to the estate. That pulls the money into probate and exposes it to court delays, legal costs, and state intestacy rules.
One boundary worth knowing: a majority of states have revocation-on-divorce laws that automatically cancel a former spouse’s designation when a marriage ends, treating the ex as if they had predeceased the owner. Those state laws generally do not reach employer-sponsored plans governed by federal benefits law, where the most recent form on file controls regardless of the divorce.
If the named beneficiary is a minor, the insurer cannot pay the child directly. A court-appointed guardian or a custodian under the Uniform Transfers to Minors Act manages the money until the child reaches the age of majority set by state law.
What a Surviving Spouse Can Do That No One Else Can
A surviving spouse has an option no other beneficiary gets: continuing the annuity as their own. Federal tax law directs that a surviving spouse be treated as the holder of a non-qualified contract for distribution purposes. For a qualified annuity inside an IRA or employer plan, the spouse can roll the inherited annuity into their own IRA or elect spousal continuation, which effectively restarts the tax-deferral clock. No distributions are required until the spouse reaches their own required beginning date.
There is a trade-off. A spouse who elects spousal continuation and then takes a withdrawal before age 59½ owes the standard 10 percent early withdrawal penalty, because the IRS now treats the contract as the spouse’s own. A spouse who instead keeps the annuity as an inherited account — rather than making it their own — avoids that penalty at any age, which is the same treatment every other beneficiary gets on death-benefit payouts.
How Long You Have to Take the Money
The deadline depends on the type of annuity and, for non-qualified contracts, whether payments to the owner had already begun.
Non-Qualified Annuities
If the owner died before annuity payments started, the entire balance must be distributed within five years of the death. If payments had already begun, the remaining interest must come out at least as fast as the schedule in effect at the time of death.
There is an exception. A named individual beneficiary can elect to spread payments over their own life expectancy instead of using the five-year rule, as long as those payments begin within one year of the owner’s death. A surviving spouse’s own options, described above, are more generous still.
Qualified Annuities (IRA, 401(k), 403(b))
For account owners who died after December 31, 2019, the SECURE Act requires most non-spouse beneficiaries to empty the account within 10 years of the owner’s death. There is no annual minimum during that period; you can withdraw on any schedule, provided nothing is left at the end of year ten.
Certain “eligible designated beneficiaries” can still stretch distributions over their own life expectancy instead:
- A surviving spouse (who can also elect spousal continuation).
- A minor child of the deceased — the life-expectancy method applies until the child reaches the age of majority, after which the 10-year clock starts.
- A disabled or chronically ill individual.
- A beneficiary not more than 10 years younger than the deceased.
If none of these fit — an adult child inheriting a parent’s IRA annuity is the common example — the 10-year rule is mandatory.
Your Payout Options
Within those deadlines, beneficiaries generally choose from three structures:
- A lump sum, which pays the full death benefit at once but concentrates the taxable gain into a single year and can push you into a higher bracket.
- Annuitization over your life expectancy, which spreads taxable income across many years and gives a predictable payment stream, but locks you into that schedule.
- Scheduled withdrawals on your own timeline within the five-year or 10-year window, with the account emptied by the deadline.
Many annuity contracts carry surrender charges for early withdrawals, but insurers commonly waive those charges on death-benefit payouts. The contract language controls, so confirm with the insurer before choosing a payout.
How an Inherited Annuity Is Taxed
Annuity gains are ordinary income to the beneficiary, not capital gains. How much of each payment is taxed depends on how the owner originally funded the contract.
Qualified Annuities
A qualified annuity held inside an IRA, 401(k), or 403(b) was funded with pre-tax dollars. The full amount of every distribution is taxed as ordinary income at your federal rate. For 2026, those rates run from 10 percent on the first $12,400 of taxable income to 37 percent on income above $640,600 for single filers.
Non-Qualified Annuities
A non-qualified annuity was bought with after-tax money, so only the earnings portion of each payment is taxable; the original premium comes back tax-free. The IRS uses an exclusion ratio — original investment divided by total expected return — to split each payment between tax-free principal and taxable gain. If you take a lump sum, the entire gain (death benefit minus original investment) is taxed as ordinary income in that single year.
No Step-Up in Basis
Unlike most inherited property, annuities do not get a step-up in basis at the owner’s death. Federal law specifically excludes them from the general rule that resets an inherited asset’s basis to its date-of-death value. You inherit the owner’s original cost basis, and all accumulated gains remain taxable when distributed.
No Early Withdrawal Penalty
Normal annuity distributions carry a 10 percent penalty for recipients under 59½. Death-benefit payouts to a beneficiary are exempt from that penalty regardless of age. The one exception is the surviving spouse who elects spousal continuation and becomes the new contract owner, as described earlier.
Federal Withholding
The insurer withholds federal income tax on the taxable portion of the payout. If you don’t specify a rate, the default for non-periodic distributions is 10 percent. You can request a different rate — anywhere from zero to 100 percent — by filing Form W-4R with the insurer.
Estate and State Inheritance Taxes
An annuity death benefit is included in the deceased owner’s gross estate for federal estate tax purposes. For 2026, the federal exemption is $15,000,000 per individual, and amounts above that are taxed at a flat 40 percent. A separate group of states imposes its own inheritance tax on the heir, with rates running from 1 percent to as high as 18 percent depending on the heir’s relationship to the deceased. Surviving spouses are typically exempt. Most estates fall below the federal exemption and most states have no inheritance tax, so most inherited annuities face no estate-level tax — but check your state if you live in one of the few that imposes one.
Filing the Claim
You collect by filing a claim directly with the insurance company. Gather these before you call:
- A certified death certificate.
- The policy or contract number, found on the original documents or annual statements.
- The deceased’s Social Security number.
- Your own government-issued photo ID and Social Security number for tax reporting.
- The insurer’s beneficiary claim form, which asks you to pick a payout option and set a withholding rate.
Submit through the insurer’s secure portal or by certified mail with return receipt. For spousal transfers, the insurer may also ask for a marriage certificate. Most claims process within 30 to 60 days. State insurance codes set deadlines for insurers to acknowledge and pay, and many states require interest on death benefits paid late. Missing or inconsistent paperwork is the usual cause of delay, so verify every detail — bank account information included — before you send the package.
What Happens If You Miss a Distribution Deadline
Failing to withdraw the required amount from an inherited qualified annuity triggers an excise tax of 25 percent on the amount that should have come out. If you correct the shortfall within a defined correction window by taking the missed distribution and reporting the additional tax on a timely return, the penalty drops to 10 percent. The IRS can waive the penalty entirely for a reasonable error if you take corrective action; you request the waiver by filing Form 5329 with a statement explaining what happened.
If You Receive Medicaid or SSI
An inherited annuity payout can disqualify you from needs-based programs like Medicaid and Supplemental Security Income, both of which impose strict income and asset limits. For Medicaid long-term care, you generally must report an inheritance to your state Medicaid agency within 10 calendar days. Medicaid treats the money as unearned income in the month you receive it and as a countable asset after that. SSI uses the same pattern: unearned income the first month, countable resource the next.
Disclaiming the inheritance does not fix the problem for Medicaid purposes. Medicaid treats a disclaimer as if you received the money and gave it away, which triggers a penalty period of disqualification. If you rely on public benefits, talk to an attorney before accepting or refusing an inherited annuity.