Calculator Author: Hans Goldstein, NPN 20602398 Updated: 2026-06-27

Inherited Annuity Tax Calculator — Which Payout Saves the Most Tax

TL;DR: Inherited a non-qualified annuity? You have three options: lump sum now, 5-year payout, or stretch over your single-life expectancy. Each has wildly different tax outcomes. This calculator shows total tax across all three so you pick the cheapest route.

Inherited Annuity Tax Calculator

Lump sum vs 5-year vs stretch payout — total tax across each route for a non-qualified inherited annuity.

Inherited annuity value ($)

Owner's cost basis ($)

Your age (beneficiary)

Your marginal tax bracket (%)

Bracket if income spread over 5 yrs (%)

Bracket if stretched (%)

Cheapest route on total tax

—

Stretching usually wins on tax but may not match cashflow needs.

Route	Annual income	Years	Total tax	Net to you

Plan my inherited annuity tax route

Non-qualified inherited annuity rules differ from inherited IRAs. The 5-year rule applies when no designated beneficiary is named or by election. Stretch uses the beneficiary's single-life expectancy from the IRS Single Life Table. Gain (value - basis) is the taxable portion; basis returns tax-free.

How this calculator works

An inherited non-qualified annuity has three payout options:

Lump sum: all gain (value - basis) taxed in one year at your full marginal rate. Highest tax in one year — potentially pushes you into a top bracket.

5-year rule: proceeds distributed over 5 years. Gain is taxed proportionally as you receive each year's payment. Spreads the tax hit, typically dropping your effective bracket.

Stretch (single-life expectancy): proceeds distributed over the beneficiary's IRS Single Life Expectancy. Smallest annual gain = lowest annual bracket = lowest total tax over time.

The calculator uses the 2022+ IRS Single Life Expectancy Table (selected ages: 50 = 36.2 yrs, 55 = 31.6, 60 = 27.1, 65 = 22.9, 70 = 18.8, 75 = 14.8, 80 = 11.2).

Gain is the taxable portion: Gain = Value - Original cost basis. Basis returns tax-free.

What the result means

Cheapest route on total tax is the answer. For most beneficiaries under 60, stretch wins on total tax because the annual income stays in lower brackets.

The table shows:

Annual income — what you receive each year under that route
Years — how long payments continue
Total tax — sum of all tax across all years
Net to you — what you keep after tax

Stretch typically minimizes tax by 20-50% vs lump sum. But it ties up the money in the annuity for decades and is taxed at then-current rates (which could rise).

When MYGA wins / when the alternative wins

Lump sum wins when: you're already in a top bracket (no upside from spreading), you need the money now, or the gain is small relative to value.

5-year payout wins when: you want fast access but don't want a single-year tax cliff. Common compromise.

Stretch wins when: you're young (long expectancy), in a low-to-mid bracket, and don't need the money now. Best long-term tax outcome.

Bonus play: 1035 exchange the inherited annuity to a new carrier with better rates BEFORE starting payouts. Preserves the original cost basis and continues deferral.

Worked example

Scenario: 55-year-old beneficiary inherits a $400,000 non-qualified annuity with $150,000 cost basis. Single, $90K wages.

Gain: $250,000
Marginal bracket: 32% if lump sum (pushes to top); 24% if spread over 5; 22% if spread over 31.6 (stretch)

Lump sum: $250K × 32% = $80,000 tax. Net $320K.

5-year: $50K gain/yr × 24% = $12K/yr × 5 = $60,000 tax. Net $340K.

Stretch (31.6 yrs): $7.9K gain/yr × 22% = $1,738/yr × 31.6 = $54,900 tax. Net $345K.

Stretch saves $25,000 vs lump sum. Plus the annuity continues to grow tax-deferred during the stretch period — not factored into this calc but adds to advantage.

Common mistakes

Defaulting to lump sum because it's "simple." Tax cost can be huge. Spend an hour with a CPA.
Missing the 60-day window for spousal continuation. Surviving spouses can continue the annuity in their own name — no payout required. Must elect within 60 days of death notification.
Confusing inherited annuity rules with inherited IRA rules. Different. Non-qualified inherited annuity uses 5-year or stretch (life expectancy). Inherited IRA (post-SECURE Act) is 10-year for most non-spouse beneficiaries.
Forgetting basis. Annuity gain is value MINUS original owner's basis (premiums paid in). Basis returns tax-free — only gain is taxed.
Stretching at very high age. An 80-year-old beneficiary has only 11.2 yrs of expectancy — stretch vs 5-year is marginal. Run the math.

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FAQ

Q: Can I stretch any inherited annuity?
A: Non-qualified inherited annuities allow stretch if elected within 60 days. Must be a designated beneficiary (named, individual person).

Q: What if there's no named beneficiary?
A: The annuity goes to the estate and the 5-year rule applies — all proceeds must be distributed within 5 years. No stretch available.

Q: How is gain calculated?
A: Gain = current value - original owner's cost basis (premiums paid net of any prior tax-free withdrawals).

Q: Are inherited annuities subject to estate tax?
A: Annuity death benefits are included in the deceased's estate for estate tax purposes (separate from income tax). Currently a $13.6M federal exemption (2026).

Q: Can a spouse continue the annuity?
A: Yes — surviving spouse can elect to continue the annuity as the new owner with no tax event. Stretch and 5-year rules don't apply. Best option for most surviving spouses.

Q: Can I 1035 the inherited annuity?
A: Yes — an inherited annuity can be 1035-exchanged to a new annuity, preserving cost basis and deferral, but the new contract must follow inherited-annuity distribution rules.

Q: Does the 10% under-59½ IRS penalty apply?
A: No — death is an exception. Inherited annuity withdrawals at any age don't trigger the 10% penalty.

Run the numbers? Get my second-opinion review.

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Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer appointed with multiple A-rated carriers

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Disclosure

This calculator is for educational and illustrative purposes only and is not a personalized recommendation, solicitation, or offer of any specific product. Outputs are approximations using publicly available rates, IRS tables, and standard payout factors as of 2026; actual carrier illustrations may differ. Annuity rates, caps, payout factors, surrender schedules, and tax brackets change frequently. Always confirm current values against the most recent carrier disclosure document, IRS Publication 590-B, and the actual contract before purchasing. Hans Goldstein is an independent licensed insurance producer (NPN 20602398) appointed with multiple A-rated carriers. Tax discussion reflects federal law as of 2026 and is subject to change. Consult a CPA and licensed advisor before acting on any output shown.