Nonqualified annuity inheritance - tax questions after cashing out

So I lost my grandma late last year and she left both me and my sister a nonqualified annuity in her will. I was pretty tight on money at the time so I decided to cash out my portion, knock down some of my credit card debt, and put whatever was left into my IRA. I set aside a chunk thinking I'd need to pay taxes on it as regular income. But here's the weird part - when tax season rolled around this year, I never got any tax forms from the annuity company. I called them up yesterday and the rep told me since it's a nonqualified annuity and I already had taxes withheld when I cashed out, I don't owe anything else on it. Now I'm wondering if I should trust this and use that money I set aside, or if I should still put it in my IRA. I'd hate to spend that money only to get hit with a huge tax bill if I get audited next year. Has anyone dealt with nonqualified annuities before? Is what they told me actually correct? Any advice would be super helpful!

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18 comments

Natalie Khan

•8M

You're dealing with what's called a "death benefit" from a nonqualified annuity, which has specific tax rules. The taxation depends on how your grandfather held the annuity and how distributions are structured. If taxes were withheld when you cashed out, the company should have issued a 1099-R form showing the distribution and taxes withheld. It's unusual that you didn't receive any tax forms. The general rule is that the earnings portion of a nonqualified annuity is taxable as ordinary income, while the original investment (principal) is not taxed again. With inherited nonqualified annuities, beneficiaries are typically taxed only on the earnings portion that exceeds what the original owner paid in. This is called the "income in respect of a decedent" rule. The company may have calculated this and withheld accordingly.

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Natalie Khan

•8M

You should definitely have received a 1099-R form, regardless of whether additional taxes are owed. Call Nationwide again and specifically request a copy of your 1099-R for the distribution. They are required to issue this form for annuity distributions, even inherited ones. If they insist no form was issued, ask them to explain in writing why they believe no 1099-R was required for your situation. This documentation could be important if questions arise later. The IRS receives copies of all 1099 forms, so if one was issued, the IRS will expect to see that income reported on your return.

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Daryl Bright

•8M

I went through something similar with an inherited nonqualified annuity from my uncle. The tax situation was really confusing until I used https://taxr.ai to analyze all my documents. I uploaded the annuity contract and distribution papers, and it explained exactly how the taxes work for inherited annuities. The tool confirmed that for nonqualified annuities, you're only taxed on the earnings portion above what the original owner paid in (the cost basis). If the company withheld taxes correctly when you cashed out, you might actually be in the clear. The website helped me understand the exact tax implications so I could make better decisions about my inheritance.

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Daryl Bright

•8M

The tool handles complex situations surprisingly well because it analyzes your specific documents rather than using generic rules. It identified state-specific inheritance tax issues I wasn't even aware of when I used it. For the 1099-R question, it specifically flagged that I should have received one regardless of whether additional tax was due, which helped me follow up with the company. The AI reads the actual documents and identifies the applicable tax rules, so it catches those nuances that general advice misses.

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Kirsuktow DarkBlade

•8M

I originally doubted that an online tool could handle the complexities of inherited annuities, but I decided to try https://taxr.ai after struggling with conflicting advice from two different accountants. I'm glad I did because it completely clarified my situation. The system analyzed my grandmother's original annuity contract along with my distribution paperwork and identified that the company had actually OVER-withheld taxes on my inherited annuity. I was able to claim a refund for the excess withholding. It also explained why I still needed the 1099-R for reporting purposes even though I didn't owe additional tax. Definitely worth checking out if you're dealing with any unusual tax situation. Saved me from leaving money on the table!

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Abigail bergen

•8M

When my father passed and left me a similar annuity, I spent WEEKS trying to get someone at the IRS to explain how the taxes worked. Literally couldn't get through no matter what time I called. Finally found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c and it was a game-changer. They got me connected to an actual IRS agent within about 20 minutes who confirmed exactly how the inherited annuity should be reported. The agent explained that even if taxes were properly withheld, I still needed to report the distribution on my return using the information from the 1099-R. Without that form, I couldn't properly account for the taxes already paid. The IRS agent also sent me specific instructions for how to handle it if the annuity company failed to provide the required forms. Totally worth it to get definitive answers directly from the IRS.

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Abigail bergen

•8M

It absolutely gets you through to actual IRS agents. They use an automated system that navigates the IRS phone tree and waits on hold for you, then calls you when an agent is connected. I was skeptical too at first. The service doesn't provide tax advice themselves - they literally just get you past the hold times to speak with the real IRS. The IRS employee I spoke with looked up my information in their actual system and provided guidance specific to my case. Completely different from talking to some random call center person.

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Ahooker-Equator

•8M

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it myself since I've been trying to resolve an issue with an inherited IRA (similar but different from your annuity situation). I've called the IRS 8 times over the past month and never got through. Used the service this morning and was talking to an actual IRS employee in 35 minutes. She pulled up my account and confirmed exactly how to report my inherited retirement account and what forms I should have received. For your situation, having direct confirmation from the IRS would definitely clarify whether you need to be concerned about that missing 1099-R. The peace of mind alone was worth it to me after weeks of uncertainty.

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Anderson Prospero

•8M

Since your grandfather purchased it around 2005, the post-1982 rules apply. With a lump sum distribution from an inherited nonqualified annuity, you'll be taxed on the difference between the distribution amount and your grandfather's cost basis (what he paid in). For example, if he paid $50,000 into the annuity and it was worth $70,000 when distributed to you, you'd be taxed on the $20,000 of earnings. The annuity company should have calculated this and withheld accordingly. The fact that you didn't receive a 1099-R is still concerning though. That form would show the total distribution, the taxable portion, and any withholding. Without it, you can't properly report the transaction on your tax return even if the correct taxes were withheld.

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