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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4512
Experience:  35 years tax experience, including four years at a Big 4 firm.
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my father just passed away. He has an annuity with a worth

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my father just passed away. He has an annuity with a worth of $107,000. My sister and I are the bentificaries of the account. The question is what part, if any, is taxable to us as we recieve the payout from this annuity? In the forms from the annuity company there is an election for tax withholding. I don't want to recieve funds only to find out there is a large tax liability.

PDtax :

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PDtax :

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Hi Lynn,

It's good that you ask about the annuity, because there are some options and decisions to make regarding payout.

I will be back to your question in just a minute.
There are annuities that employees in public employee retirement plans have ((TSA, or tax sheltered annuity, generally 403(b) plans) or annuities that the annuitant purchases themselves (these are often called variable annuities).

A TSA is similar in taxation to an inherited traditional IRA. If funded with tax-deductible money (pre-tax, like a 401(k) plan at your work), the payments will be taxable (since the principal or investment growth was never taxed).

If your father purchased a variable annuity product (these are called non-qualified annuities), the amount of the original investment will be returned tax free, but the growth will be taxable.

First, determine the type of annuity, and also your need for payout. If you need/want the money now, then the type of annuity will drive how much will be taxable, have taxes withheld, and get your $.

Second, determine if he was in payment status or not. That could impact the payment options (and tax deferral techniques) you could choose if you can wait for the money.

Please advise more about the annuity, and I can discuss your options in more detail.

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Customer: replied 3 years ago.

i understand that he bought a paid-up annuity about 12 years ago. the dividends were reinvested in the fund. if i understand your answer, the orginal investment would come to me tax free but the accumilated interest would be taxable. this could also effect my social security taxes as well as my effective tax rate.


would this be taxed at ordinary income rates or cap gains?

the problem with variable annuity products is the earnings, often from capital gains, are taxed as ordinary income rates when withdrawn. that's the trade off for the tax deferral for the years the investment was put to work.

The good part is only the gains are taxed, and the insurance company will have the cost basis records available so you'll know how much will be taxable. You don't get a stepup in basis like you would for most other inheritances.

Thanks again from Just Answer.