9 Mistakes To Avoid When Inheriting an Annuity | Mia Samson
By: Mia Samson
Receiving an annuity after someone passes away might seem pretty straightforward. You inherit the account, figure out what you want to do with the money, and move on.
Unfortunately, inherited annuities can be a lot more complicated than that. There are specific rules to follow, deadlines that matter, and decisions you make early on can impact your taxes and your options down the road.
I saw this firsthand with a client who inherited a retirement annuity when he was only 15. No one told him that he was required to take annual withdrawals from the account, so one was missed before he was even old enough to manage it himself. Years later, he tried to move the account to another company and the transfer was rejected. That was when he finally found out there was an issue. What should have been a pretty straightforward inheritance turned into something we had to go back and clean up years later. Here are some of the biggest mistakes I see people make with inherited annuities.
Mistake 1: Not Knowing What Type of Annuity You Inherited
The first thing you need to figure out is whether the annuity is qualified or non-qualified. It might seem like if the annuity was funded with after-tax money, it would automatically be non-qualified, but that isn't always the case. Some workplace retirement plans allowed employees to make after-tax contributions, which means an annuity can still sit inside a retirement account even if some of that money has already been taxed.
This is an important distinction because qualified and non-qualified annuities can have very different rules around how and when the money needs to come out. Before making any decisions, ask the insurance company to confirm exactly what type of annuity you inherited. You want to know what you're working with before deciding what to do next.
Mistake 2: Missing Important Deadlines to Start Distributions
Some inherited annuities require you to start taking money out within a certain period of time. If you miss those deadlines, you could lose the option to spread the withdrawals out over a longer period and instead have to take the money out much faster, potentially creating a much bigger tax bill.
This can happen pretty easily, especially if an estate is tied up in probate, the beneficiary is a minor, or paperwork simply gets delayed. The important thing to know is that just because the estate process is delayed doesn't necessarily mean the tax deadlines are delayed with it.
Mistake 3: Naming a Minor as a Beneficiary Without Proper Oversight
Leaving an annuity to a minor can create complications since children generally can't manage these accounts themselves. Without the right person in charge, accessing the money may require court involvement, which can be costly and time-consuming.
Even with an adult overseeing the account, distribution deadlines and tax rules still apply. This is exactly what happened with my client. No one was monitoring the account, and the issue went unnoticed for years.
Minor children of the original owner may qualify for more flexible distribution rules, while other minors generally do not. If you're leaving an annuity to a minor, consider appointing a custodian or establishing a trust, and make sure someone understands the rules and deadlines.
Mistake 4: Misunderstanding How Long You’re Allowed to Spread Distributions
You may have heard that inherited retirement accounts can be "stretched" over your lifetime, but the SECURE Act changed that for many people who inherited after 2019.
For qualified annuities, most non-spouse beneficiaries now have 10 years to empty the account, and some may also need to take annual distributions along the way. There are exceptions for certain beneficiaries, including spouses, minor children, and those who meet other specific requirements.
Non-qualified annuities follow different rules and may still allow payments over your life expectancy, but timing matters. How you inherited the account matters too, so make sure you know which rules apply to you.
Mistake 5: Incorrectly Handling RMDs
If you're required to take annual distributions, figuring out how much you need to withdraw isn't always as straightforward as it sounds. If you miss a required withdrawal, there can be penalties, even if it was an honest mistake. The good news is that the IRS may reduce or waive the penalty if you catch the mistake, correct it quickly, and have a reasonable explanation for what happened. So if you realize you missed a required withdrawal, the sooner you address it, the more options you may have to fix it.
Mistake 6: There Is Usually No Step-Up in Basis
One of the biggest surprises with inherited annuities is that they don't get the same tax treatment as stocks or mutual funds held in a regular investment account.
With many investments, the cost basis resets when someone passes away, which can significantly reduce the taxes owed on the growth. Annuities generally don't get that same benefit.
That means even though you inherited the account, some of the growth inside of it may still be taxable when you eventually take the money out.
It's important to understand what portion of the account could be taxable before deciding when and how to take distributions.
Mistake 7: Taking Everything at Once Can Be Expensive
It can be tempting to cash out an inherited annuity right away. It's simple, you get the money, and the account is done. And depending on your situation, that may be the right choice — you just want to understand the tax impact before doing it.
Taking everything out at once could mean recognizing a large amount of taxable income in a single year, potentially pushing you into a higher tax bracket. Spreading withdrawals over multiple years may have a different tax impact. Neither option is automatically better; the important thing is knowing what the tax bill could look like before you make the decision.
Mistake 8: Your Transfer Options Are Limited
Inherited annuities can't always be moved the same way as your own retirement accounts. For qualified annuities, non-spouse beneficiaries generally need to move the money directly from one company to another into a properly titled inherited account — taking the money yourself first could create a taxable distribution.
Non-qualified annuities may sometimes be moved through a 1035 exchange without triggering immediate taxes, but there are specific rules to follow. Before moving anything, confirm the process and potential tax impact with both companies.
Mistake 9: Annuities Can Lose Value
Not every annuity guarantees your principal — many invest in stock or bond markets and can go up or down over time. Your withdrawal strategy should account for market risk, not assume steady growth every year.
In Summary…
Inherited annuities can get complicated quickly, and unfortunately, some of the decisions you make early on can be difficult to undo later. Before moving the account, taking a large withdrawal, or assuming your current distribution strategy is the right one, talk to a trusted financial advisor who can help you understand the rules, deadlines, and tax implications specific to your situation.
If you've inherited an annuity and aren't sure what your next step should be, we are happy to help you walk through your options. You can reach me at mia@gerberkawasaki.com
Gerber Kawasaki Wealth & Investment Management is an investment advisor located in California and is registered with the Securities and Exchange Commission (SEC). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Gerber Kawasaki only transacts business in states in which it is properly registered or is excluded or exempted from registration requirements. Additional information about the firm is available on the SEC’s Investment Adviser Public Disclosure website at adviserinfo.sec.gov.
Mia Samson is a Financial Advisor of Santa Monica, California-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately ~$5.16B billion in assets under management and assets under advisement as of 10/05/26. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This material is for general information only and is not intended to provide specific tax or investment advice. Consult your tax professional regarding your individual situation. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn't buy any investment without doing their research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results."
