Receiving the death benefit of an annuity

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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Joined: Fri Dec 28, 2012 8:04 pm

Receiving the death benefit of an annuity

Post by VULGATE » Fri Dec 28, 2012 8:20 pm

My grandmother had a multi-rate annuity and named me as the beneficiary for the death benefit. It's not a particularly large annuity... $26K current balance. She opened it about 2.5 years ago by investing a single lump sum of $24,500. Her entire estate is probably worth around 300K.

Conveniently, I have just taken a 1 year hiatus from work and have just a few hundred dollars of income to declare on my 2012 taxes. So it would be great if I could manage to get ahold of the death benefit before the end of the year.

Question: Do I have to pay taxes on the entire $26K or just the $1500 in interest that the annuity has earned?

Alan S.
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Location: Prescott, AZ

Re: Receiving the death benefit of an annuity

Post by Alan S. » Fri Dec 28, 2012 10:06 pm

Assuming this is a non qualified annuity, you would pay taxes only on the gains, ie the 1,500. The beneficiary is taxed in the same manner as the owner would have been had she cashed in the annuity.

On the other hand, if you have some stretch options for your benefit, annual payments would also be mostly tax free, so you are not saving that much on taxes compared to inheriting an IRA that would be fully taxable and cashing it out in a year where you have minimal income would save you more in total taxes.

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