Yes, the taxation of the death benefit proceeds for annuity payments is affected by the length of time between the date of death and the date the first payment goes out.
- For tax-qualified annuities, your first annuity payment must be issued by December 31 in the year after the death to avoid potential tax penalties.
- For non-tax-qualified annuities, your first annuity payment must be made within one year from the date of death.
- If your first non-tax-qualified annuity payment is issued after one year from the date of death, the following will occur:
- We will report the entire taxable portion of the death benefit in the year in which the first payment is made. This means that although you will not have full access to the funds in a lump sum, you could have a taxable event.
- You will also need to complete Section 5 tax withholding information if you wish to elect out of federal tax withholding. If you do not elect out of withholding, an amount equal to 10% withholding of the taxable amount for federal income tax (plus any mandatory state income tax if applicable) will be withheld. The amount of income tax withheld will reduce the death benefit value dollar for dollar.
- After the taxable amount is reported to you as income, you will not be taxed on this amount again when annuity payments begin; instead, only earnings from the annuity payments will be taxable each year.
If you will receive the first payment outside of these timeframes, contact us to discuss your specific situation.