Rules for Inheriting an IRA Annuity

by Alexis Lawrence

An IRA annuity combines the attributes of both a standard retirement plan and an annuity plan. The rules regarding contributions and taxes to the account are similar to those of a traditional IRA, but the plan offers a pre-arranged distribution schedule like a standard annuity. The rules for an inherited IRA annuity are in line with the rules for inheriting a traditional IRA.

IRA Contributions

One benefit of an IRA annuity over a standard annuity is that an IRA annuity is generally a “qualified” savings account. This means that, like a standard IRA, you may contribute pre-tax earnings to the annuity and these earnings continue to grow tax-free. Taxes are taken out on the funds only when the funds are withdrawn from the account, so, when you receive the distributions from an IRA annuity, you must declare these distributions as income.

Annuity Payments

When you set up an annuity, you also set up the payment schedule for that annuity. The payments are based on the lifespan of a single individual, known as the annuitant. The annuitant continues to receive distributions in equal amounts until the funds in the IRA annuity run out or the annuitant dies. Since an IRA annuity gets funded tax free, like a standard IRA, you must pay taxes on the distributions when you receive them.


When the annuitant who initially receives payments from an annuity dies, the remaining distributions from the annuity go to the individual listed as the beneficiary on the account. The tax treatment for this inherited annuity remains the same for the beneficiary as it was for the original annuitant. When the beneficiary receives annuity distributions, he must declare these distributions as income on his income tax return.

Closing the IRA Annuity

Some annuities give the beneficiary of the account the right to withdraw the funds and close the account. If the beneficiary chooses to take this route, he often forfeits a percentage of the annuity contributions and earnings, and may be charged a surrender fee. The beneficiary also must declare all of the withdrawn funds as income on his tax return if the IRA annuity was a qualified account. If the annuity happens to be a non-qualified account, funded with taxed income, the beneficiary must declare only the earnings on his taxes.

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