How Does My Annuity Beneficiary Work?

An annuity is a financial product that provides a steady income stream for a specific period, such as the annuitant's lifetime. One of the essential features of annuities is that they allow the annuitant to designate who should receive the remaining payments in the event of their death. However, the rules governing annuity beneficiaries differ depending on whether the person is the annuitant's spouse or someone else.

If the spouse is designated, they can assume ownership and receive payments based on the annuity schedule. This arrangement would be tax-deferred, meaning that the spouse would only be responsible for taxes on the distributions when they withdraw them. The spouse can also roll over the inherited annuity into an IRA account, allowing them to defer taxes further.

On the other hand, if a non-spouse inherits the contract, they have three options:

Lump-sum payment: They can receive the remaining value as a one-time payment and must pay income taxes immediately on the lump sum.

Non-qualified stretch: They can stretch the payouts and the required income taxes throughout their lifetime.

Withdraw smaller amounts: They can withdraw smaller amounts from the annuity five years after the annuity holder's death or withdraw the entire amount in the fifth year.

It's worth noting that the choice of beneficiary significantly impacts tax calculations, so it's crucial to document your wishes when designating beneficiaries.

Moreover, only the annuity owner can name a beneficiary, but they can change beneficiaries anytime, provided the contract doesn't require them to name an irrevocable beneficiary. An owner can also choose multiple beneficiaries, designating a percentage for each person. Contracts also frequently allow the selection of a contingent beneficiary who will receive the payments if the primary beneficiary dies before the annuity owner does.

It's crucial to note that if an annuity owner doesn't have a designated beneficiary in the annuity contract, the annuity must go through probate, the legal process for recognizing a will and distributing the assets within an estate. This can be expensive and time-consuming, and it could take several months before heirs receive their inheritance. Therefore, having a designated beneficiary is essential when purchasing an annuity.

An annuity is an excellent product for people looking to have a steady stream of income during retirement, and it's essential to understand how the beneficiary rules work. You should take the time to document your wishes and choose a designated beneficiary. If you're unsure how to do this, consider consulting with a financial advisor who can guide and help you make informed decisions.

In conclusion, designating a beneficiary is a crucial aspect of purchasing an annuity, and it's essential to understand the rules governing annuity beneficiaries. If your spouse is the beneficiary, they can assume ownership of the annuity, and the arrangement would be tax-deferred. However, if a non-spouse beneficiary inherits an annuity, they have three options: lump-sum payment, non-qualified stretch, and withdrawing smaller amounts. The beneficiary choice also significantly impacts tax calculations, and it's essential to document your wishes. Finally, if you don't have a designated beneficiary in the annuity contract, the annuity must go through probate, which can be expensive and time-consuming.

Reference: Forbes (Jan. 19, 2023) “What Is An Annuity Beneficiary?” (https://www.forbes.com/advisor/retirement/annuity-beneficiary/)