When you inherit an annuity, the distribution method you choose can have significant tax implications. Depending on the contract terms and the timing of the original owner’s passing, beneficiaries typically have three primary ways to receive the funds.

• Lump-Sum Distribution: This option allows you to withdraw the entire account balance at once. While it provides immediate access to all funds, it may result in a higher tax burden, as the total gain is typically treated as taxable income in a single year.
• The 5-Year Rule: This requires that the entire annuity balance be fully distributed within five years of the original owner’s death. You have flexibility regarding when and how much you withdraw during this window, as long as the account is empty by the deadline.
• Life Expectancy (Stretch) Payout: This method allows you to take distributions over your remaining life expectancy. By spreading withdrawals out over a longer period, you may be able to manage your tax liability more effectively while keeping the remaining balance invested.

It is important to review the specific contract language and consult with a tax professional before making a final decision.