Inherited Annuities

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O'ROURKE LIFE & RETIREMENT

Inherited an Annuity?
Make the Most of Your Legacy

Navigate complex decisions with confidence. Our licensed insurance professionals help you understand your options, minimize taxes, and preserve the wealth you've inherited.

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Understanding Your Inheritance

What Is an Inherited Annuity?

When someone passes away and leaves you an annuity, you become the beneficiary of a financial contract that can provide ongoing income or a lump sum. Understanding your options is crucial to making the right decision for your financial future.

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What You Inherit

You'll receive either the remaining contract value or a guaranteed minimum amount, depending on the annuity type. This can include accumulated premiums, growth, and any death benefit riders.

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Your Relationship Matters

Spousal beneficiaries have the most flexible options, including the ability to continue the contract as their own. Non-spousal beneficiaries face different rules and timelines.

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Tax Implications

Qualified annuities (funded with pre-tax dollars) are fully taxable, while non-qualified annuities only tax the growth portion. Your payout choice significantly impacts your tax burden.

Your Beneficiary Options

Primary Ways to Receive Your Inheritance

Each option carries different tax implications, time requirements, and income potential. Since the SECURE Act of 2019, most non-spousal beneficiaries of qualified annuities must use the 10-year rule, but other options may be available depending on your situation.

Lump Sum Distribution

Receive the entire annuity value in one payment. Provides immediate access to funds but carries the highest tax burden.

Typically referenced for: Paying off high-interest debt, major purchases, or when you need immediate liquidity.
Planning consideration: Entire taxable amount is reported in one year, potentially pushing you into a higher tax bracket.
Consider: The tax hit may significantly reduce your actual inheritance.

Ten-Year Rule (Qualified Annuities)

For qualified annuities, most non-spousal beneficiaries must withdraw the entire balance within ten years of the owner's death. Allows beneficiaries to take distributions at different times within the required period, subject to IRS rules.

Planning consideration: Distribution timing flexibility available within the IRS 10-year rule.
Tax impact: Pay taxes only on amounts withdrawn each year, allowing strategic tax planning across multiple years.
Deadline: Must complete all withdrawals by December 31st of the tenth year following death. Note: Five-year rule may still apply to some non-qualified annuities.

Life Expectancy (Stretch) Payments

Distributions may be spread over a beneficiary’s lifetime based on IRS life expectancy tables.

Planning consideration: Understanding how life expectancy–based distributions are treated under IRS rules.
Tax impact: Smallest annual distributions mean lowest yearly tax bill. Money continues growing tax-deferred.
Note: Available for non-qualified annuities; qualified annuities may be subject to the 10-year rule under the SECURE Act.

Spousal Continuation

Spouses can assume ownership and treat the annuity as their own, maintaining all original terms and tax-deferred status.

Planning consideration: Surviving spouses continuing the annuity’s growth and income strategy under IRS rules.
Tax impact: No immediate tax consequences. Distributions follow normal annuity rules.
Benefit: Can name new beneficiaries and delay distributions until age 73 (for qualified annuities).

Inherited IRA Rollover

Inherited IRA Rollover (General Information) For inherited qualified annuity assets, one common structure beneficiaries may encounter is an Inherited IRA, which is established and maintained through a qualified custodian under IRS beneficiary rules.

Typically referenced for: Reviewing how inherited retirement accounts are structured under IRS rules.
Tax impact: No taxes on the rollover itself. Distributions taxed as ordinary income when taken.
Important: Non-spousal beneficiaries typically must deplete the account within 10 years under current law.

Beyond Simple Distribution

Repositioning Your Inherited Annuity

You're not limited to just taking withdrawals. Strategic repositioning can increase your legacy, eliminate taxes for heirs, and create more value than the original annuity.

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1035 Exchange to Better Annuity

Move your non-qualified inherited annuity into a newer contract with better rates, lower fees, or enhanced features—completely tax-free using a 1035 exchange.

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Convert to Single Premium Life Insurance

Transform a taxable annuity into a guaranteed, tax-free death benefit for your heirs. Can also include long-term care riders for tax-advantaged access to care funds while you're alive.

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Fund Life Insurance from Qualified Annuities

Even with qualified annuities, strategic withdrawals or Roth conversions can fund life insurance, turning taxable IRA dollars into tax-free legacy wealth.

The Single Premium Life Insurance Strategy

One of the most powerful moves for non-qualified annuities is exchanging them into single premium whole life insurance via a 1035 exchange. This strategy works with any annuity amount. Here's what this accomplishes:

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Increase What Your Family Receives: Transform your annuity into a much larger, guaranteed tax-free death benefit for children or grandchildren. For example, a $120,000 annuity could become a significantly larger death benefit—often multiplying the legacy value.

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Eliminate Taxes for Heirs: Instead of beneficiaries inheriting a taxable annuity, they receive an income-tax-free life insurance benefit.

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Lock in Guarantees: Move from market-dependent contracts into guaranteed death benefits with no performance risk.

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Add Long-Term Care Benefits: Some policies can be structured to include Long-Term Care riders. This allows you to access a portion of the death benefit tax-free for qualifying long-term care expenses while you're still alive, according to IRS rules and policy guidelines.

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Asset-Based Care Options: You can also allocate a portion of your annuity value to asset-based long-term care solutions, providing flexible access to funds for care needs while preserving remaining value for heirs.

The Exchange is Tax-Free: No taxes are owed at the time of the 1035 exchange, and your gains continue to grow tax-deferred until the death benefit pays out—completely income tax-free to your beneficiaries.

Advanced Strategies

Working With Qualified Annuities

While you can't directly 1035 exchange a qualified annuity (IRA) into life insurance, there are powerful tax-aware strategies to achieve similar results.

Controlled Withdrawals to Fund Life Insurance

Some individuals choose to take planned annual withdrawals from the qualified annuity and use them to pay for single-premium or limited-pay life insurance.

Benefit: Converts taxable IRA dollars into tax-free death benefit over several years, avoiding one large tax hit.
Strategy: Spread withdrawals to manage tax brackets while building substantial life insurance coverage.
Result: Turn mandatory taxable distributions into leveraged, tax-free wealth for your family.

Roth Conversions + Life Insurance Funding

In certain situations, individuals may convert part of the IRA annuity to a Roth IRA in a controlled manner, then use tax-free Roth withdrawals to fund life insurance.

Triple benefit: No RMDs on the Roth, tax-free withdrawals, AND tax-free life insurance death benefit.
Strategy: Layer Roth conversions over multiple years to minimize tax impact.
Result: Transform today's taxable balance into future tax-free dollars and legacy value.

Learn More About Roth Conversions →

Use RMDs for Life Insurance Premiums

Some individuals choose to redirect Required Minimum Distributions to fund life insurance instead of letting them sit in low-yield accounts.

Benefit: Turns mandatory taxable withdrawals into leveraged benefits for your family or future care needs.
Strategy: Use some or all RMD amounts to pay life insurance or hybrid coverage premiums.
Result: Money that would be taxed and spent becomes permanent, tax-advantaged family wealth.

Our Process

How We Help You Reposition Inherited Annuities

We don't just list options—we design and implement a complete strategy tailored to your situation.

Contract & Statement Review

We read your annuity contract and death-benefit provisions, identify whether it's qualified or non-qualified, and confirm distribution rules and deadlines.

Option Mapping

Lay out in plain English your actual choices: lump sum, scheduled withdrawals, stretch options, 1035 exchanges into better annuities, conversion to single premium life, or strategies to fund life insurance from qualified accounts.

Tax-Aware Modeling

Show how each option affects your taxes over several years. Compare "do nothing," "cash out now," and "reposition + plan" scenarios to find the best path forward.

Design & Shop the Solution

For non-qualified annuities: decide whether to keep, exchange into a better annuity, or leverage into single premium life. For qualified annuities: blend distributions, Roth conversions, and life insurance funding. We work with multiple carriers to find the best fit.

Handle All Paperwork & Implementation

We coordinate 1035 exchanges, beneficiary claims, transfers, and new applications. You won't get bounced around—we handle carrier communications and follow-up.

Coordinate & Review

When needed, we collaborate with your CPA or attorney so your annuity plan fits your broader retirement, tax, and estate strategy. We provide ongoing reviews to adjust as your situation changes.

This isn't a one-and-done conversation. We remain available to review, adjust, and help you make the most of the decisions we've put in place.

Tax Planning

Understanding Tax Implications

The type of annuity and your payout choice determine your tax liability. Strategic planning can save you thousands in unnecessary taxes.

Qualified Annuities

Funded with pre-tax dollars (IRA, 401k)
100% of distributions are taxable
Taxed as ordinary income at your current rate
Subject to 10-year distribution rule for most beneficiaries
No early withdrawal penalty for inherited accounts

Non-Qualified Annuities

Funded with after-tax dollars
Only the growth/earnings are taxable
Original contributions return tax-free
More flexible distribution timelines
Stretch option still available over life expectancy

Smart Tax Strategies

Spread distributions over multiple tax years
Coordinate with other income to manage brackets
Consider Roth conversions when applicable
Time large distributions for low-income years
Use charitable giving strategies to offset taxes

Why Choose O'Rourke Life & Retirement

The Insurance Agent Advantage

As licensed insurance professionals and financial professionals, we offer specialized guidance that many traditional financial advisors simply can't match.

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Deep Product Expertise

We specialize in annuities and insurance products. While financial advisors handle stocks and bonds, we're experts in the exact instruments you've inherited.

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Direct Carrier Access

We work directly with insurance companies, enabling us to navigate complex beneficiary rules, expedite claims, and access options not available through brokerage accounts.

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Insurance-Focused Solutions

We can show you how to use your inheritance to create lifetime income, maximize death benefits, or convert to more favorable products—strategies outside most advisors' expertise.

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Objective Analysis

We're not managing investment portfolios that compete with annuities. Our focus is helping you make the best decision for your inherited annuity, period.

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Licensing & Knowledge

As licensed life, health, and annuities agents, we complete rigorous training specifically on annuities, tax rules, and beneficiary options—giving us specialized expertise in these exact scenarios.

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No Asset Minimums

Many financial advisors require substantial minimums or charge fees based on assets. We work with all beneficiaries regardless of inheritance size.

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Fixed Annuity Options

We offer fixed, no market loss, guaranteed annuities—products that only licensed insurance agents can provide. Financial advisors typically cannot access these guaranteed insurance solutions.

What Makes Us Different

Many Financial Advisors:

May lack specific annuity training
Often prefer liquidating annuities to manage assets
Charge ongoing fees that can erode value
Focus primarily on investment portfolios
Cannot sell fixed, guaranteed annuities
May not have insurance licenses
Limited access to insurance carriers
Rarely specialize in 1035 exchanges or single premium life strategies

O'Rourke Life & Retirement:

Specialized annuity and insurance expertise
Objective guidance on keeping or repositioning products
No ongoing management fees for annuity consulting
Annuities + Life Insurance + Legacy Planning as one integrated strategy
Offer fixed, no market loss, guaranteed annuities
Fully licensed for all annuity and life insurance transactions
Direct relationships with top carriers
Expert in 1035 exchanges, single premium life, and tax-advantaged repositioning

Important Disclaimer

The information provided on this page is for educational purposes only and should not be construed as tax, legal, or financial advice. Tax treatment of inherited annuities, 1035 exchanges, life insurance, and long-term care benefits can be complex and varies based on individual circumstances.

We do not provide tax or legal advice. While we specialize in insurance products and can explain general tax advantages of various strategies, you should always consult with a qualified tax professional (CPA or tax attorney) and/or legal advisor before making final decisions regarding your inherited annuity.

Long-term care benefits are subject to IRS rules and specific policy guidelines. Tax-free treatment of long-term care benefits applies when benefits are used for qualified long-term care services as defined by the IRS and when the policy meets certain requirements.

Ready to Make Informed Decisions?

Schedule a complimentary consultation with our licensed insurance professionals. We'll review your inherited annuity, explain all your options, and help you create a strategy that minimizes taxes and maximizes your legacy.

Call (904) 373-8374 Explore Your Options

Common Questions

Frequently Asked Questions

Get answers to the most common questions about inherited annuities.

It depends on the contract type and whether it's qualified or non-qualified. For qualified annuities (like those in IRAs), most non-spousal beneficiaries must distribute the entire balance within 10 years under the SECURE Act. Non-qualified annuities may offer more flexibility, including stretch options over your lifetime or a 5-year distribution period. Spousal beneficiaries typically have the most options, including the ability to treat the annuity as their own.

Generally no. The 10% early withdrawal penalty that applies to retirement accounts typically does not apply to inherited annuities, regardless of your age. However, you will still owe ordinary income taxes on the taxable portion of distributions.

Yes, in many cases. For non-qualified annuities, you can often elect options that allow continued tax-deferred growth rather than taking a lump sum immediately. You might also be able to do a 1035 exchange into a better annuity or even single premium life insurance while maintaining tax deferral. For qualified annuities, you can roll over into an inherited IRA to continue tax-deferred growth, though you'll still need to take distributions according to the 10-year rule.

A 1035 exchange is a tax-free transfer of a non-qualified annuity into another annuity or life insurance product. This powerful strategy allows you to reposition your inherited annuity without triggering immediate taxes. You might exchange into a better annuity with lower fees, or convert it into single premium life insurance that provides a larger, tax-free death benefit to your heirs. The exchange is completely tax-free, and your money continues to grow tax-deferred.

A lump sum means you pay taxes on all the taxable earnings in one year, which could push you into a higher tax bracket and significantly reduce what you actually receive. Stretched payments spread the tax liability over multiple years, keeping you in a lower bracket and preserving more of your inheritance. For a non-qualified annuity, only the growth is taxable. For a qualified annuity, the entire distribution is taxable as ordinary income. Strategic planning can save you thousands in taxes.

Yes! Through a 1035 exchange, you can convert a non-qualified annuity into a single premium life insurance policy with long-term care riders. This allows you to access a portion of the death benefit tax-free for qualifying long-term care expenses while you're alive, while still preserving a death benefit for your heirs. You can also use the annuity value for asset-based long-term care solutions that provide flexible access to funds for care needs.

Protect Your Inheritance

Turn complexity into clarity with O’Rourke Life & Retirement

Tailored Insurance. Trusted Guidance.

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St. Augustine, FL