Oakland, CA | East Bay; Tax Consequences when Inheriting a Variable Annuity

Hi, I’m Erik Wolfers. I’m the founder and managing member of First & Main Financial. Today, I want to talk just a little bit about inheriting a variable annuity.

A variable annuity is insurance-base product where you can put after-tax money (usually; qualified funds are used as well at times) into an account and then have the money grow tax-deferred. Over time if you want, you can annuitize it (take a stream of income) or take it out and to retain the variable annuity status. There are insurance riders that you can add to a variable annuity which can limit the downside or protect the value—there are a lot of different choices.

Today, I want to talk just a little bit about inheriting a variable annuity—we’ve recently had a couple of clients inherit variable annuities. When you inherit a variable annuity the question becomes, when should you take the money out and what happens when you take the money out.

When you put after-tax money into a variable annuity, when it comes back out it is not taxed because it was already taxed before it went in. However, there are the gains inside of the variable annuity—so depending on how you take it out, some portion will be taxed.

There is a timeline or a time frame for when the money has to come out, but there is flexibility. One thing that’s caught a couple of our clients was the taxable issue is not always perfectly understood. Insurance products many times are not at all clear in the service on the products, and it’s not necessarily done by people who are experts in the products. If you do inherit a variable annuity, just know that there may be tax consequences, and how and when you pull the money out may make a difference on the taxes that you wind up paying—so it’s good to get help from an expert.

One other note is that there are variable annuities that are pretty expensive and the insurance-type additions you can add to them make them even more expensive. However, there are very low cost variable annuities as well, which can be a good choice for some people.

If you are looking for some financial guidance; whether for a one time financial plan or continuing advice on your investments, we invite you to meet with a First & Main Financial planner for a free consultation. We would be more than happy to sit down with you, assess your situation and review our services to help navigate your financial future.