Inherited annuity with death benefit in IRA

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
bad1bill
Posts: 51
Joined: Thu Jul 26, 2018 6:14 am
Location: Colorado

Inherited annuity with death benefit in IRA

Post by bad1bill »

Looking for advice...'

My wife's aunt named her and our 2 children as beneficiaries on the annuity. It was in an IRA. There is an enhanced payout (26%) if taken over 5 years rather than a lump sum right now. That part (5 year payout) is the no-brainer.

From a bit of research, it seems all the money must now be withdrawn within a 10 year period (can't be kept in a rollover/inherited IRA). For my wife (65.5 YO and retired), I think I would roll the 1/3 into her IRA to avoid immediate tax penalties and we would draw it down in years 5 through 10. Any problem with this approach or should I follow the kids and bite the bullet now?

For my kids, I guess it would be best if they simply bit the bullet and paid taxes now as they would incur the 10% penalty if they rolled it into an inherited IRA and had to withdraw it over the next 10 years . They are both gainfully employed and making 60 to 100 K a year.

Thanks for any thoughts and ideas....
sailaway
Posts: 3343
Joined: Fri May 12, 2017 1:11 pm

Re: Inherited annuity with death benefit in IRA

Post by sailaway »

You cannot roll an IRA inherited from anyone but your spouse into your own IRA.

Also, there is no 10% penalty for withdrawals from an inherited IRA, so there is nothing to follow there.

Each beneficiary should have an inherited IRA set up solely for this inheritance so that they can follow the applicable rules.
User avatar
David Jay
Posts: 11333
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Inherited annuity with death benefit in IRA

Post by David Jay »

You need to differentiate between the annuity terms and the IRA terms.
bad1bill wrote: Wed Jul 21, 2021 6:11 pmThere is an enhanced payout (26%) if taken over 5 years rather than a lump sum right now. That part (5 year payout) is the no-brainer.
It is the annuity that is offering a 26% benefit for withdrawing from the annuity over 5 years. Each beneficiary needs to determine if that makes sense. If the funds are going to be invested in stocks, a reasonable expected (not guaranteed) gain might be 40% (7% annually) so 26% is not a "no-brainer". If they are going to "put it under the mattress" (keep it in cash), then 26% looks pretty good.

Remember, this has nothing to do with IRA distributions, these are withdrawals from the annuity into the IRA. If they withdraw a lump sum immediately, the IRA can be moved to a low cost custodian (Vanguard, Fidelity, Schwab, etc) for the remainder of the 10 years.

In any event, all money in each of the inherited IRAs must be distributed within 10 years so tax planning is important for all 3 beneficiaries.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
bad1bill
Posts: 51
Joined: Thu Jul 26, 2018 6:14 am
Location: Colorado

Re: Inherited annuity with death benefit in IRA

Post by bad1bill »

Thanks for the quick replies; from them I garner that:

1. They all should set up an Inherited IRA with Fidelity (or..)
2. No 10% early withdrawal fee
3. Tax planning is crucial especially for my wife and either lump or deferred may make sense depending on our situation and asset allocation. The kids are 31 and 28 and have many years of anticipated growth so lump sum is what seems to make best sense.

I am also going to consult with a financial planner with whom I can be more in depth...
User avatar
David Jay
Posts: 11333
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Inherited annuity with death benefit in IRA

Post by David Jay »

bad1bill wrote: Wed Jul 21, 2021 8:09 pm Thanks for the quick replies; from them I garner that:

1. They all should set up an Inherited IRA with Fidelity (or..)
2. No 10% early withdrawal fee
3. Tax planning is crucial especially for my wife and either lump or deferred may make sense depending on our situation and asset allocation. The kids are 31 and 28 and have many years of anticipated growth so lump sum is what seems to make best sense.

I am also going to consult with a financial planner with whom I can be more in depth...
Again, be careful with the definitions: “Lump sum” out of the annuity and move assets to (Fidelity, Vanguard, Schwab).

Withdraw 10% per year from each brokerage IRA to minimize tax rates for all 3 beneficiaries. If one waits 10 years then taxes on the full amount in one tax year may push the recipient into a higher tax bracket.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Post Reply