Inheriting a $30,000 Annuity? Here's What to Know About Taxes

Two sons inherited a small annuity from their grandmother. Here's how the money is taxed and what they can do with it.

When a loved one passes away and leaves you money, it's natural to wonder what to do next — and how much of it the taxman will take. A parent recently asked exactly that after their two adult sons inherited a $30,000 annuity from their late grandmother.

First, what's an annuity? It's a contract you buy from an insurance company. You put money in, and the company pays it back later — often during retirement. When the owner dies, whatever value is left goes to the named beneficiaries (the people chosen to receive the money).

The good news on taxes:

Simply *inheriting* money usually doesn't count as taxable income, so the sons won't automatically jump into a higher tax bracket (the rate at which your income is taxed).
Federal estate taxes (a tax on very large inheritances) won't apply here — they only hit huge estates, and $30,000 is far below the limit.

The catch: With annuities, you owe tax when you actually *withdraw* the money, not when you inherit it.

If the annuity was funded with after-tax dollars (money already taxed), only the *earnings* are taxed.
If it was funded with pre-tax dollars, the whole withdrawal is taxed as ordinary income.
Taking it all out at once (a lump sum) in a single year could push them into a higher tax bracket.

The five-year rule: Most inherited annuities must be fully withdrawn within five years of the owner's death. Some contracts let you spread payments out over your lifetime, which can lower taxes — though with only $30,000, the savings are small.

What to do with the money? Once received, the sons could park it in:

A high-yield savings account (a savings account paying higher interest, currently up to about 4.20%) — easy to access anytime.
A certificate of deposit (CD) — locks the money in for a set period in exchange for a fixed, predictable return. Good for those who don't want risk.

Bottom line: The inheritance itself isn't taxed, but withdrawals are. Checking the tax impact before taking a lump sum is smart, and safe savings options can keep the money working.

This is an AI-generated summary. Read the original article at: https://www.marketwatch.com/story/my-two-sons-will-inherit-a-30-000-annuity-from-their-grandmother-what-should-i-do-with-the-money-8882f396?mod=mw_rss_topstories