How is an inherited annuity taxed as a beneficiary? Tax implications?

First, I'm sorry for your loss. Regarding the annuity taxation, it depends on what type of annuity it was. There are two main possibilities: If it was a qualified annuity (funded with pre-tax dollars like a traditional IRA), then generally the entire distribution will be taxable as ordinary income. This is because neither your grandfather nor the account has previously paid taxes on those funds. If it was a non-qualified annuity (funded with after-tax dollars), then only the earnings portion is taxable as ordinary income - the principal amount your grandfather put in would come to you tax-free. The insurance company should provide you with information showing what portion is considered taxable. As for withholding, it's optional but might be a good idea to prevent underpayment penalties. A standard withholding of 10% is common, but it depends on your tax bracket. You can also choose not to withhold and instead make quarterly estimated tax payments if you prefer.

I went through this exact situation last year when my aunt passed and left me as beneficiary on her annuity. I was totally lost trying to figure out the tax implications until I found https://taxr.ai - it's this AI tax assistant that analyzed all my documents and explained everything in normal human language. It was super helpful because it showed me exactly what portions were taxable and which weren't based on my specific situation. The thing I liked most was that I could upload the paperwork from the insurance company and it would spot things I completely missed - like figuring out it was a non-qualified annuity which meant I only had to pay taxes on the growth portion. It even helped me understand whether I should do the withholding option or just set aside money for taxes later. Honestly saved me from making a costly mistake.

Just wanted to follow up here. I decided to try taxr.ai after seeing this recommendation and it was honestly a game changer for dealing with my dad's estate. I uploaded the annuity documents I received and it immediately identified that it was a non-qualified annuity and broke down exactly what portion was considered earnings (taxable) versus return of principal (non-taxable). The system showed me where on the documents to look for the cost basis information and even explained how the insurance company calculates the taxable portion. Saved me hours of research and probably a call with a CPA which would have cost me hundreds. It even explained how to report everything correctly on my tax return next year. Super helpful for complex tax situations that are outside the normal W-2 stuff.

In my experience dealing with inherited annuities, you might want to contact the IRS directly to confirm your specific situation. I tried for WEEKS to get through to someone at the IRS to ask similar questions last year and kept hitting a wall of hold times and disconnections. Then I found this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in under an hour when I had been trying for days without success. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed exactly how the annuity should be reported and what forms I needed, which wasn't obvious from just the paperwork I had. Totally worth it because the agent gave me specific guidance for my situation rather than general advice, and I got documentation of the call for my records in case there were ever questions.

I need to eat my words and apologize to Profile 9. After struggling with annuity inheritance questions similar to the OP, I finally broke down and tried Claimyr last week out of desperation. I was 100% convinced it was going to be a waste, but I was proven wrong. Got a call back in about 40 minutes and spent nearly an hour with an IRS agent who walked me through EXACTLY how to handle the taxes on my inherited annuity. The agent confirmed I only needed to pay taxes on the gains portion since mine was non-qualified and explained how to calculate the taxable amount using the info from the 1099-R. Most importantly, they told me which specific form to file (Form 1040 with the amount going on line 4b) and how to document that this was an inherited annuity so it wouldn't trigger any penalties. Saved me from making a costly mistake on my taxes next year.

One important thing that hasn't been mentioned yet - if you're inheriting an annuity, you generally have several options on how to receive the money: 1. Lump sum distribution (all at once) 2. Five-year distribution (take it all out within 5 years) 3. Annuitization (payments over your lifetime) 4. Spousal continuation (if you're the spouse) Each has different tax implications! If you take a lump sum of a large annuity, it could push you into a higher tax bracket for that year. Spreading it out might be more tax-efficient depending on your situation.

Did anyone mention that you'll probably receive a 1099-R form from the insurance company? That form will show the taxable amount in Box 2a. If it says "Taxable amount not determined" and Box 2b is checked, you'll need to figure out the taxable portion yourself or with professional help. Also, depending on when your grandfather passed away, there might be estate tax considerations too, although that's only for very large estates (over $12.06 million for 2025).

I'm dealing with a similar situation right now with my grandmother's annuity, and one thing that really helped me was getting organized with all the paperwork first. Make sure you have copies of everything - the original annuity contract, death certificate, beneficiary designation forms, and any correspondence from the insurance company. The insurance company should provide you with a detailed breakdown showing the original premium payments (your grandfather's contributions) versus the accumulated earnings. This is crucial for determining what portion is taxable. Don't be afraid to call them multiple times if the first representative can't give you clear answers - I had to speak with three different people before I got someone who really understood the tax implications. Also, consider the timing of when you take the distribution. If you're expecting a raise or bonus this year that might push you into a higher tax bracket, it might make sense to delay the distribution until next year. The insurance company usually gives you some flexibility on timing as long as you stay within the required distribution rules. One last tip - keep detailed records of everything for your tax preparer. This isn't something you want to handle with basic tax software if it's a substantial amount.