My husband has an annuity that he has not entered in an IRA. If I inherit this annuity, does it work the same as if he had an IRA? Can I roll the funds into my IRA? We are both retired and in our early 80’s. – Use
No, you will not be able to roll your spouse’s annuity into your IRA. Depending on the type of annuity, there are situations where it may be allowed because of your relationship, but not in the situation you describe.
A financial advisor can help you manage your retirement assets and make decisions about rollovers and Roth conversions. Contact a consultant for free.
Annuities, regardless of type, are classified as qualifying or non-qualifying based on how they are funded. If the annuity contract is held in a tax-advantaged retirement account, such as a traditional IRA or 401(k), it is considered a qualified annuity. If the annuity is purchased with after-tax dollars outside of the retirement account, it is classified as non-qualified.
In other words, the term “qualified” does not describe the annuity itself as much as it describes where the money came from. A fixed annuity, variable annuity or indexed annuity can all be eligible or ineligible depending on whether it is funded with IRA/401(k) dollars or with after-tax dollars.
You said he didn’t put that money into his IRA, so I think that means he bought an annuity with other money and it’s ineligible.
Nonqualified annuities cannot be rolled over into an IRA, just as stocks held in a taxable brokerage account cannot. The main reason is that nonqualified annuities are purchased with after-tax dollars and are not placed in retirement accounts. As a result, the IRS does not allow these assets to be converted to IRA funds through a rollover. (And if you need help deciding whether annuities fit your retirement plan, talk to a financial advisor.)
SmartAsset and Yahoo Finance LLC may earn commission or income by linking to the following content.
If you inherit a non-qualified annuity, the annuity “does not roll over” into the IRA. Instead, it continues to be treated as an annual contract with its own rules and tax structure.
It also affects how it is taxed. Generally, only the gains in the annuity are taxable. The principal premium paid on the contract is then not taxed. However, distributions are generally treated as income first, meaning that the taxable portion often comes before the taxable portion.
Also, once the contract is inherited, you need to take distributions under a certain schedule. This depends on the terms of the annuity contract and IRS rules. Some annuity contracts require distributions within a certain period of time after the owner’s death, and some offer options to extend payments.
While a legacy annuity continues to generate income, it doesn’t work the same way as a legacy IRA. (Consider working with a financial advisor if you have additional questions about annuity or IRA inheritance.)
If your spouse has a qualifying annuity, the situation will be different. Because qualified annuities hold property in retirement accounts, they generally follow the same inheritance and distribution rules that apply to IRAs.
Spousal beneficiaries are treated differently under the tax code. A surviving spouse can roll over an inherited IRA, including qualified annuities inherited from a spouse, into an IRA in her own name.
This offers several advantages. First, it simplifies administration. Once rolled over into your own IRA, you no longer need to treat the account as an inherited asset. You can manage it just like your other retirement accounts.
Second, it may help with required minimum distributions (RMDs). Since you’re already in your early 80s and taking RMDs, this may not change your situation dramatically, but rolling it into your own IRA may allow the account to be combined with your other IRA assets and managed more efficiently.
Non-spouse beneficiaries do not have the option to roll it over to an IRA in their own name.
Unless the annuity is a qualified annuity, meaning it’s already held in a retirement account, you can’t roll it into your IRA.
If your spouse’s annuity is nonqualified, an inheritance will give you the same rollover options as if you inherited his IRA. Instead, you need to follow the distribution and tax rules that apply to legacy nonqualified annuities.
Before making any decisions, it may be worth verifying whether an annuity is eligible or not by reviewing the contract paperwork or directly inquiring with the issuing company. This is a very specific detail, so it’s important to get it right.
A financial advisor can help translate goals into a coherent strategy that addresses investment, finance, exit planning and risk management. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors serving your area, and you can make a free introductory call with your advisor matches to decide which one is right for you. If you’re ready to find an advisor to help you achieve your financial goals, start now.
As income rises, gradually increasing pension contributions can offset lifestyle inflation from saving long-term. Even a small percentage increase over time can significantly improve future income potential.
Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers readers’ questions about personal finance and tax topics. Have a question you want answered? email AskAnAdvisor@smartasset.com And your questions will be answered in the next column.
Please note that Brandon is not an employee of SmartAsset and does not participate in SmartAsset AMP. He has been compensated for this article.Some reader-submitted questions have been edited for clarity or brevity.
