Annuity beneficiary rules: Rights and payout options
When people purchase an annuity, they are typically focused on long-term security and future retirement income. They may also think about what happens to the annuity when they die, including the possibility that no one will inherit it.
When a beneficiary does receive the remaining value, the transfer matters because it carries specific financial and tax implications. These factors shape how much of the death benefit they keep.
Learn how annuity beneficiary rules apply to different types of recipients and what happens when an annuitant dies.
What is an annuity beneficiary?
The beneficiary of an annuity is the person, group, or entity an annuity owner chooses to receive remaining funds (generally the greater of the contract value or death benefit) if the owner dies.
Owners, annuitants, and beneficiaries
The annuitant is the person whose life expectancy determines how long annuity payments last. In many cases, people purchase an annuity for themselves, making them both the owner and annuitant. In other cases, the owner opens an annuity account for another person, like their spouse, who receives the annuity’s payouts.
An annuitant cannot change the terms of the contract the way an owner can. The fact that annuitants receive payments from an annuity does not make them beneficiaries. Beneficiaries are chosen by the annuity owner to receive funds when the owner or annuitant dies (the language in the contract controls, some contracts trigger on the owner’s death, others on the annuitant’s death).
How do annuity death benefits work?
How beneficiaries receive annuity death benefits depends on two factors.
The contract phase
In the accumulation phase, the investment is still growing and collecting interest. In this phase, the beneficiary of a deferred annuity generally receives the contract value or a guaranteed minimum amount specified in the contract (a “standard death benefit” equal to at least the contract value or premium paid, less prior withdrawals, is typical for a deferred fixed annuity, but the exact terms are set by the contract).
The payout phase
Some annuities do not provide a death benefit or limit how many payments beneficiaries receive. A life-only payout ends when the annuitant dies, while a period-certain payout stops payments once the term ends.
A joint annuity (or joint-and-survivor payout option) covers two people, often spouses. Payouts continue as long as one person is alive. When the first person dies, the surviving spouse continues receiving payments (which may reduce to a specified percentage of the original benefit, such as 50% or 66⅔%, depending on the payout election). Only after the surviving spouse dies will any remaining value pass to other beneficiaries and only if the payout option elected includes a residual benefit. For example, a joint-life-only payout leaves no residual benefit; therefore, there is no death benefit at the last owner’s death regardless if there’s remaining value.
Who can be named as an annuity beneficiary and why it matters
Annuities allow one or more beneficiaries, who are often spouses, other loved ones, and charities. Here is more on how different types of beneficiaries access their inheritance. The federal tax rules that apply to the beneficiary depend on whether the annuity is qualified (held inside an IRA or an employer retirement plan) or NON-qualified (owned individually with after-tax dollars).
Spouse
Spouses have more flexible payout options than other beneficiaries.
They can opt for spousal continuation, meaning they take over the annuity. This option is helpful for tax-deferred annuities still in the accumulation phase because growth continues without immediate income tax.
Spouses can also choose to roll over the savings into an IRA or another retirement plan. This preserves the tax-deferred status. For qualified annuities, a surviving spouse who is the sole designated beneficiary may also elect to be treated as if the the surviving spouse were the deceased employee/spouse. This election can permit the spouse to defer required distributions later than a spousal rollover would, and to use the more favorable Uniform Lifetime Table.
If the annuity is in the payout period, the surviving spouse can continue receiving the scheduled payments. Depending on the terms of the contract, the spouse may also take a lump sum.
Non-spouse
Non-spouse beneficiaries include:
- Children
- Family members
- Friends
- Charities
- Trusts
A non-spouse designated beneficiary generally cannot assume ownership of the contract or roll it into their own IRA. Instead, they may set up an inherited IRA (for qualified annuities) or take distributions from the inherited non-qualified annuity contract under the applicable post-death rules.
Which post-death withdrawal deadline applies depends on both the type of annuity and whether the beneficiary is a “designated beneficiary,” an “eligible designated beneficiary” (EDB), or a non-designated beneficiary. In general:
- qualified annuity (IRA / 401(k) / 403(b) / governmental 457(b)), death after 12/31/2019: most non-spouse designated beneficiaries are subject to the 10-year rule — the entire balance must be distributed by the end of the 10th calendar year after death. If the decedent had reached their required beginning date before death, the beneficiary must also take annual RMDs in years 1–9 of the 10-year window. Inherited Roth IRAs are not subject to the year-1–9 annual RMD requirement; only the year-10 full-payout deadline applies.
- qualified annuity, non-designated beneficiary (e.g., the decedent’s estate or a non-qualifying trust): the pre-SECURE 5-year rule applies if the decedent died before the required beginning date; otherwise, distributions continue over the decedent’s remaining life expectancy.
- NON-qualified annuity, non-spouse designated beneficiary, the beneficiary may either (a) take the full amount within 5 years of the owner’s death or (b) begin substantially equal life-expectancy payments within one year and take them over the beneficiary’s life expectancy (the “stretch”).
- Eligible designated beneficiaries (EDBs) under either regime — surviving spouse, minor child of the decedent until the child reaches the age of majority, individual with a disability, chronically ill individual, or an individual not more than 10 years younger than the decedent — may stretch distributions over their life expectancy.
Multiple beneficiaries
Owners can assign multiple beneficiaries, like their children, and determine how to split funds between them.
Each beneficiary can choose a different payout option, so tax treatment may differ. For qualified annuities, whether each beneficiary is treated separately for RMD purposes depends on whether separate account rules are satisfied by the applicable deadline (generally September 30 of the year after death for identification purposes and December 31 of the year after death for separate account establishment). If not, the least-favorable beneficiary’s status can apply to all beneficiaries.
Contingent beneficiaries
If the primary beneficiary has died or cannot receive inherited funds, the money in the annuity contract goes to a contingent beneficiary. If the contract has no contingent beneficiary, distribution becomes complicated because the annuity becomes part of the owner’s estate and enters a probate process. This can delay distributions and lead to legal fees and possible estate taxes for surviving family members. An estate is also a non-designated beneficiary, which typically results in less favorable withdrawal deadlines than would apply if a person or qualifying trust had been named.
What happens to an annuity when an annuitant dies? Key outcomes explained
Whether an annuity is annuitized and the type of contract significantly impacts how much a beneficiary will receive. Here is why.
Annuity not yet annuitized
If a non-spouse beneficiary inherits an annuity not yet annuitized — still in the accumulation phase — they generally receive the contract value or a guaranteed minimum death benefit. They can either take a lump-sum payment or a stream of periodic payments, but the IRS’s five- or 10-year withdrawal rule still applies.
Deciding whether to take a lump sum or periodic payments often comes down to tax planning. If a beneficiary takes a lump sum, they will be taxed on this income in a single tax year. This can create a hefty income tax bill from the IRS. A large annuity payout could even bump the beneficiary into a higher tax bracket.
Annuity already in payout phase
If the annuity is already paying income when the owner dies, non-spouse beneficiaries may either choose a lump sum or periodic payments depending on the payout option originally elected, a life-only payout typically ends at the annuitant’s death with no continuing benefit; a period-certain or joint-and-survivor payout continues }
Life-only vs. period-certain contracts
Life-only payout options and period-certain have payout options have restricted payment periods. The following table demonstrates how they affect beneficiaries:
- Life-only
- Payment term: The annuitant’s lifetime.
- What beneficiaries receive: Likely nothing. Payments stop when the annuitant dies.
- Period-certain
- Payment term: A fixed term, like 10 or 20 years.
- What beneficiaries receive: Remaining scheduled payments for the rest of the term.
- Life with period-certain
- Payment term: The annuitant’s lifetime, but no less than a stated period (e.g., life with 10-year certain).
- What beneficiaries receive: If the annuitant dies during the certain period, the beneficiary receives the remaining payments through the end of that period. If the annuitant survives the certain period, no residual passes to a beneficiary.
- Joint and survivor
- Payment term: As long as either of two annuitants is living.
- What beneficiaries receive: Continuing payments (often at a reduced percentage such as 50% or 66⅔%) to the surviving annuitant. A residual passes to a beneficiary only if the elected option includes one.
Inheriting an annuity: Tax rules and payout decisions
If you have inherited an annuity, it is important to plan your payout and tax strategies. Here is what you need to know.
Qualified vs. non-qualified annuities
First, determine whether the inherited annuity is qualified or non-qualified.
A qualified annuity is held inside a tax-advantaged retirement arrangement (e.g., a traditional or Roth IRA, a 401(k), a 403(b), or a governmental 457(b) plan). Contributions may have been made with pre-tax dollars or, for a designated Roth account, with after-tax dollars. Distributions from a pre-tax qualified annuity are generally taxed as ordinary income; qualified distributions from an inherited Roth IRA annuity are generally federal-income-tax-free once the account’s 5-year holding period is satisfied.
A non-qualified annuity is owned individually and funded with after-tax dollars. Upon distribution to a beneficiary, only the earnings (gain) portion is taxed as ordinary income; the return of the owner’s cost basis is not taxed. The beneficiary is generally taxed on the same portion of each payment that would have been taxable to the owner.
These two taxation structures significantly impact how much income tax the beneficiary pays.
Lump sum vs. periodic payments
Many inherited annuities can be distributed in either lump-sum or periodic payments. You will be taxed once on a lump-sum payment or separately on each periodic payment. Spreading out tax payments prevents a large IRS bill. But a lump-sum payment might still be the right option if you need funds upfront, such as to cover a home renovation or tuition. Note that the timing of tax does not change the amount of the beneficiary’s post-death withdrawal deadline. A beneficiary subject to the 10-year rule must still fully distribute the account by year 10 regardless of whether payments are periodic or lump-sum.
Stretch option
The stretch option allows certain beneficiaries to spread payments out over their lifetimes. Aside from surviving spouses, eligible beneficiaries include minor children, people with disabilities or chronic illnesses, and beneficiaries not more than 10 years younger than the deceased. A minor child’s stretch ends when the child reaches the age of majority (age 21 based on the federal requirement), at which point the 10-year rule begins to run. Non-qualified annuities retain a separate life-expectancy stretch for designated beneficiaries.
5-year and 10-year rules
Withdrawal deadlines for a beneficiary depend on the type of annuity, beneficiary status, and IRS regulations.
Most non-spouse beneficiaries of a qualified annuity must withdraw the entire balance within 10 years of the annuitant’s death. If the decedent had reached their required beginning date, non-EDB beneficiaries must also take annual RMDs in years 1–9 of the 10-year window). Beneficiaries of an inherited Roth IRA annuity are not subject to the year-1–9 annual RMDs — only the year-10 full-payout deadline applies.
Some non-qualified annuities use a five-year rule when no eligible beneficiary exists or when the terms of the contract specify that timeline. On the owner’s death: (a) if payments have begun, remaining payments continue at least as rapidly as under the method in effect at death; (b) if payments have not begun, the entire interest must either be distributed within 5 years or begin substantially equal life-expectancy payments within one year of death, with a spousal continuation exception.
Missed deadlines can result in IRS penalties and fees. Specifically, an excise tax on any shortfall from a required minimum distribution. SECURE 2.0 reduced that excise tax from 50% to 25% and further reduces it to 10% if the shortfall is corrected during the correction window. Exceptions may apply for minor children, people with disabilities or chronic illness, and beneficiaries close to the deceased in age.
Annuities and beneficiaries: Common mistakes
Both annuity owners and beneficiaries make mistakes when planning or receiving inheritances. Here are a few common errors to avoid.
Beneficiaries take a lump sum without understanding tax impact
Taking your annuity inheritance in a lump-sum payment can be a good idea in certain situations, like if you have a sizable financial need. But it is important to set funds aside for taxes. The IRS taxes the entire withdrawal or the interest-earned portion, depending on the type of annuity — which reduces the long-term value of the inherited annuity.
Beneficiaries miss required minimum distribution deadlines
Required minimum distribution (RMD) rules apply to qualified annuities, and the requirements differ for owners and beneficiaries. Owners must begin RMDs at age 73. The applicable RMD age rises to 75 for individuals reaching age 74 after December 31, 2032. Lifetime RMDs do not apply to Roth IRAs or designated Roth accounts in a 401(k), 403(b), or governmental 457(b).
Some beneficiaries must take annual RMDs within the 10-year window, while others only need to take all the money out of the contract by the end of year 10. The year-1–9 annual RMD requirement applies to non-EDB designated beneficiaries when the decedent had already reached their required beginning date.
A lump-sum withdrawal removes the entire balance at once, satisfying the RMD rule. But people who choose periodic payments must carefully read the IRS’s withdrawal rules.
Owners assume annuities work like life insurance
Life insurance protects surviving loved ones when the insurance holder passes. But annuities are designed for retirement income, not guaranteed inheritance. A life-only payout may leave no death benefit for beneficiaries. Many deferred annuity contracts include a standard death benefit available during the accumulation phase, typically the death benefit is equal to at least the contract value or premium paid less any withdrawals. Enhanced or return-of-premium death-benefit riders may also be available on some products, sometimes for an additional charge. Owners should review the terms of the
- Life-only
- Payment term: The annuitant’s lifetime.
- What beneficiaries receive: Likely nothing. Payments stop when the annuitant dies.
- Period-certain
- Payment term: A fixed term, like 10 or 20 years.
- What beneficiaries receive: Remaining scheduled payments for the rest of the term.
- Life with period-certain
- Payment term: The annuitant’s lifetime, but no less than a stated period (e.g., life with 10-year certain).
- What beneficiaries receive: If the annuitant dies during the certain period, the beneficiary receives the remaining payments through the end of that period. If the annuitant survives the certain period, no residual passes to a beneficiary.
- Joint and survivor
- Payment term: As long as either of two annuitants is living.
- What beneficiaries receive: Continuing payments (often at a reduced percentage such as 50% or 66⅔%) to the surviving annuitant. A residual passes to a beneficiary only if the elected option includes one.
contract to understand how earnings and annuity payments continue after death.
Owners fail to update beneficiary designations
When annuity owners do not update their beneficiaries, their money can go to people they didn’t intend, such as an ex-spouse or a deceased relative. And if there is no beneficiary or contingent, the funds may be distributed through an expensive probate proceeding. Beneficiary designations on annuity contracts generally control over conflicting provisions in a will or trust. You should review beneficiary designations after any major life event (marriage, divorce, birth of a child, death of a named beneficiary).
This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes. Beneficiary planning has significant legal, tax, and estate implications; consult a qualified tax advisor and, where appropriate, an estate-planning attorney and a licensed insurance producer about your situation.
Tax rules stated in this article reflect the SECURE Act of 2019, the SECURE 2.0 Act of 2022, and Treasury final regulations under IRC §401(a)(9) published July 19, 2024 (T.D. 10001), effective for 2025 and later distribution calendar years, and 2026-dollar amounts published by the IRS in Notice 2025-84 / Rev. Proc. 2025-32. Tax rules are subject to legislative and regulatory change; see IRS.gov for updates.
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