I inherited two annuities upon my mother's death. I received 1099R as distribution codes4D. I put them into new annuities. Do I have to pay the tax on them?

[tcoryell333]

State inheritance tax was paid on them

[HelenC12 · Accepted solution]

@tcoryell333 

I wanted to update my response with one other option. You stated that you moved your inherited annuities to new annuities.

• If you inherit a nonqualified survivor annuity, you have the right to make a Section 1035 exchange, in which you exchange the existing annuity contract for a different one in this tax-free transaction. The taxes on the nonqualified annuity pertain only to the payments in excess of the original cost basis. Include in your annual income the amounts that aren't cost basis. There are very strict IRS requirements that have to be followed to do a Section 1035 exchange. 

Generally, yes, you have to pay taxes on your two inherited annuities and how much you pay depends on whether it was a qualified annuity or a non-qualified annuity. 

A qualified annuity is an annuity that’s purchased using pre-tax dollars through a tax-advantaged account, such as a 401(k) plan, or an individual retirement account. Any distributions paid to the annuitant from a qualified annuity are treated as taxable income in the year they’re received. 

A non-qualified annuity is funded using after-tax dollars. The contributions made to a non-qualified annuity aren’t taxable. However, any growth or earnings on the initial investment are tax deferred. You have to pay ordinary income tax on the earnings part of the distributions. 

When you have to pay taxes depends on how you decide to receive distributions from the annuity. There are four ways to take money from an inherited annuity.

1. Lump sum - You could opt to take any money remaining in an inherited annuity in one lump sum. You’d have to pay any taxes due on the benefits at the time you receive them.
2. Five-year Rule - The five-year rule lets you spread out payments from an inherited annuity over five years, paying taxes on distributions as you go.
3. Nonqualified Stretch - You take the remainder of the contract and stretch annuity payments out over the rest of your life. Your life expectancy sets the basis for your actual payment amount and schedule.
4. Periodic or Annualized Payout - You get payments for the remainder of your life, but the payment amount is not based on your life expectancy.

Contact your financial advisor on which option you chose.

I'm so sorry for your loss.

[Edited 03/20/22|6:18 am PST]

[tcoryell333]

Thank you Helen for your condolences!

The funds that I received from the annuities were from nonqualified annuities and I put them back into annuities

[HelenC12]

You're very welcome. 

Someone who inherits a non-qualified annuity will have to pay taxes on withdrawals of the earnings but not the principal, just like the original owner would. You aren't able to "rollover" your inherited annuity to your nonqualified annuity and indefinitely not pay tax. You have the four options listed in my previous answer. 

[tcoryell333]

Thank you again, Helen. You have been a great help!