Annuities & Inherited IRAs

August 26, 2022


A lot of times I get my weekly newsletter topics from conversations I have had throughout the week.  This week, I had 3 separate conversations about Inherited IRAs and if you can use them to fund annuities.

Well, the short answer is, yes!  But there are some rules and some rules to abide by.  In this week’s newsletter, we’ll look at what the rules are for funding an annuity with an Inherited IRA.

Let me start with the disclaimer that I am not a tax professional and this information is meant for educational purposes only.  You should always consult with your personal tax professional before making any decisions.


What is an Inherited IRA?


As many of you already know, an IRA stands for Individual Retirement Account.  It is a tax-deferred investment account that has grown since its inception without paying any taxes on the principal or the gains.  So, that means 100% of the money is taxable when a person begins to access the money.

To help spread the tax liability across multiple decades, most people will take smaller distributions to fund an income gap or to make a purchase that they do not want to use their savings for.  As long as the owner is over 59 ½ years old there is no IRS penalty on the withdrawal.

However, there is that percentage of the population that has plenty of income through Social Security, pensions, rental income, dividends, etc. that they do not need the money for living expenses.  What many of those people do is use that money as an inheritance for their heirs.

When that money is passed on after the IRA owner’s death, it becomes an “Inherited IRA.”  And that’s where the rules start to change depending on who inherited the IRA.


What are the rules?


Spousal Inherited IRAs:

If you inherit the IRA from your spouse, then it basically becomes YOUR IRA, and the same rules apply as they did to the spouse who owned the IRA originally.  It’s also known as a “Spousal Inherited IRA.”

The SECURE ACT changed the rules as far as the timing of Required Minimum Distributions.  Before the SECURE ACT, the year after you turned 70 ½ years old, you had to take RMDs.  But as long as you were not older than 70 ½ in 2021, you would not be forced to take RMDs.  If you were already 71 years old in 2021, then you would have been required to take your first RMD.

The good news about Spousal Inherited IRAs is that you can place them with pretty much any annuity company that fits your needs.


Non-Spousal Inherited IRAs:

A “Non-Spousal Inherited IRA” is exactly what it sounds like – an IRA you inherited from someone you were not married to.

This type of Inherited IRA is where the rules get tricky because it all depends on when the original owner of the IRA passed away.

I’ll separate this category into 2 different parts.  Pre-January 1, 2020 Death, and Post-January 1, 2020 Death.


Pre-January 1, 2020 Death:

If the original owner of the IRA passed away prior to January 1, 2020, then that Inherited IRA falls under the old rules that you could take distributions based on your own Uniform Lifetime Expectancy Table.  This is sometimes referred to as a “Stretch IRA”. 

Those of you that have inherited a Non-Spousal IRA have pretty much unlimited options.  Most annuity companies – not all, but most – will still accept a pre-2020 Non-Spousal Inherited IRA. 

One of the best options for this type of Inherited IRAs, if you are wanting to use the money for living expenses, is an Income Annuity that will provide a guaranteed payment every month for the rest of your life.  It should stay in compliance with the IRS rules because the payout percentage should be higher than the RMD.


Post-January 1, 2020 Death:

If you have a Non-Spousal Inherited IRA from someone who passed away on, or after January 1, 2020, then your IRA falls under a new set of rules.  If the person that cared about you enough to leave you a sum of money passed away on, or after January 1, 2020, you are now required to withdraw all of the money from that account by December 31st of the tenth year after their death.

By spreading the payments over a ten-year period, you hopefully will be able to not bump yourself into a higher tax bracket and minimize the percentage that Uncle Sam will take from you.

As far as annuities go, there is a limited number of companies that will accept this money.  When this rule first changed, there was literally only 1 company, but as time goes on there are more and more that are accepting Non-Spousal Inherited IRAs.  So, this is a great place to protect the money while you are taking your distributions without fees or risk of losing it in a market downturn.

Exceptions to the 10-year rule include payments made to an eligible designated beneficiary:

  • A surviving spouse
  • A minor child of the account owner
  • A disabled or chronically ill beneficiary
  • A beneficiary who is not more than 10 years younger than the original IRA owner or 401(k) participant.

These beneficiaries can “stretch” payments over their own life expectancy.


I personally have never received an inheritance and I don’t know if I ever will.  I never wanted for a meal or for shelter, but I grew up in a lower-middle-class neighborhood and my parents worked very hard their whole lives to provide for me and my siblings.  They do not have a huge amount of savings that will be passed on.  So, if you are in the position of receiving an inheritance, I personally would look at that as a pure blessing.  And I’m assuming with this article that you will want to respect the money in the same way as the person who gave it to you. 

I’m sure almost everyone who has received an inheritance would trade it back for more time with the person who left it to them.  Unfortunately, that is a part of this world that we live in.  We will all lose people that we love.  However, the annuity option could be a very responsible way to protect that money while it’s being distributed to you and your family to enjoy. 

If you are in this situation and confused about what the options are, please don’t hesitate to book a short phone call with me by clicking the “Schedule A Call” button in the top right corner of this screen and we’ll find the best solution for you!

All the best,


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