Are Retirement Investments Payable on Death?
The beneficiary of a retirement plan can collect money and other property when the plan owner dies. You can inherit the retirement investments from a qualified employer plan, individual retirement account or nonqualified annuity. Your tax obligation depends on the type of plan. You might receive a lump-sum payout or annual distributions.
Employers might offer profit sharing, pension, annuity or stock bonus plans. Normally, contributions to these plans are tax-deductible, which means you must include your inheritance in your taxable income. You may receive a death benefit from an insurance policy owned by the deceased’s plan. If you inherit a survivor annuity, you can normally choose between a lump-sum payout or periodic payments for either a set period of time or for the rest of your life. Your tax bill reflects the amount distributed to you during any particular year.
You might inherit an IRA. You can request an immediate payout, a payout over five years or payments based on life expectancy. You can roll an inherited IRA into a “beneficiary IRA,” which is registered in the name of the deceased for your benefit. You can’t roll any other money into or out of a beneficiary IRA, but you can control the investments held in the account. You can also convert an inherited IRA into a qualified annuity. Your annuity distributions are fully taxable unless the IRA contained any nondeductible contributions. Inherited Roth IRAs are tax-free.
A nonqualified annuity is one that doesn't reside in a qualified plan or IRA. Contributions are not deductible, but can grow tax-deferred. If you inherit a survivor nonqualified annuity, you’ll only pay tax on the portion that exceeds the amount the deceased paid into the account. Annuities can offer fixed payments. Variable annuities offer payments that depend on your investment performance. These annuities can be invested in mutual funds or other assets. You may inherit the assets or their cash value, depending on whether the deceased died before annuity payments began.
The Internal Revenue Service collects estate taxes on large estates. As of 2013, individuals can exclude $5.25 million over their lifetimes from estate tax. Any excess is taxable at a top rate of 40 percent. If you inherit an annuity before the deceased received any payments, you can deduct the taxable portion from any estate taxes that pass to you. Take the deduction on Schedule A of IRS Form 1040. You can deduct the full amount of income tax stemming from the annuity -- it’s not subject to the 2 percent of adjusted gross income exclusion.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.