Using an Annuity to Protect an Inheritance

Quick Answer: Can You Use an Annuity to Protect an Inheritance?

Yes – an annuity can protect an inheritance by converting a lump-sum windfall into guaranteed income that cannot be spent impulsively, lost to market swings, or drained by a long retirement. A MYGA or income annuity is one of the most straightforward ways to make an inherited sum last.

Last updated: March 2026 | Reviewed by: Elizabeth Prescott, AnnuityJournal Editorial Team

Receiving an inheritance – whether $50,000 or $500,000 – creates a decision most people are not emotionally prepared for. Grief, family pressure, unsolicited advice, and the temptation to spend create a dangerous window in which large sums disappear faster than anyone expects. An annuity can serve as a circuit breaker: a structured vehicle that locks in the inheritance and guarantees it will generate income for years or decades to come.

Why Inheritances Are Vulnerable

Studies consistently show that a large percentage of inheritances are depleted within a few years of receipt. A 2012 study published in the Journal of Financial Planning found that one-third of people who received an inheritance had a negative savings rate within two years. The reasons are predictable: home renovations, vehicle purchases, family loans, lifestyle creep, and poor investment decisions in a period of emotional vulnerability.

An annuity addresses this structural problem by creating a contractual barrier between the inheritor and the lump sum. Once placed in a MYGA or converted to income via a SPIA, the money cannot be accessed impulsively – it works on the terms you set at purchase, not on the terms of your worst day.

Best Annuity Types for Protecting an Inheritance

MYGA (Multi-Year Guaranteed Annuity) – Best for Preserving and Growing

If the goal is to preserve the inheritance and earn a guaranteed return without immediately annuitizing, a MYGA is the cleanest option. You deposit the inherited funds, lock in a rate (currently 4.5%-5.25% for 3-5 year terms), and the money grows tax-deferred until the term ends. You can then decide at maturity whether to renew, convert to income, or take the full value.

A 5-year MYGA on a $200,000 inheritance at 5.00% grows to approximately $255,256 by maturity – without any market risk. For an inheritor who is not yet sure what to do with the money, a MYGA buys time while the funds grow.

SPIA (Single Premium Immediate Annuity) – Best for Instant Lifetime Income

If the inheritor is already retired and the goal is to convert the inheritance into reliable income, a SPIA makes the most sense. A $150,000 SPIA purchased by a 68-year-old might generate $950-$1,050 per month for life – guaranteed regardless of market conditions or how long they live.

This approach essentially converts a one-time windfall into a private pension. For beneficiaries who did not save much for retirement, this can be transformational.

Deferred Income Annuity (DIA) – Best for Late-Stage Income Planning

A DIA lets you deploy the inheritance now but delay income until a future date – often 70, 75, or 80. Because income is deferred, the payout at activation is substantially higher than a SPIA purchased at the same age. A 60-year-old deploying a $100,000 inheritance into a DIA with income starting at 75 might generate $1,200-$1,500/month for life starting 15 years from now.

Inherited IRA Annuities: A Special Case

If you inherited an IRA (traditional or Roth) that contained an annuity, the rules are more complex. Under the SECURE Act, most non-spouse beneficiaries must fully distribute the inherited IRA within 10 years. This changes the calculus significantly:

• Inherited traditional IRA with annuity: You must take distributions within 10 years. The annuity’s surrender schedule may conflict with the 10-year distribution requirement – check for surrender charges on early access before deciding how to handle it.
• Inherited Roth IRA with annuity: Same 10-year rule applies for most non-spouse beneficiaries, but distributions are tax-free.
• Spouse beneficiaries: A surviving spouse can treat an inherited IRA as their own, roll it into a new IRA annuity, and avoid the 10-year rule entirely.

If you inherited a non-IRA annuity (non-qualified), you have more flexibility. Non-spouse beneficiaries typically have the option to take a lump sum, stretch distributions over their own life expectancy, or receive the full value within 5 years depending on the contract terms.

Tax Considerations When Inheriting an Annuity

Inheriting a non-qualified annuity comes with a tax obligation that surprises many beneficiaries. The original owner’s gains inside the annuity – the earnings above what they originally deposited – are taxable as ordinary income when distributed to a non-spouse beneficiary. Unlike inherited stocks or real estate, there is no step-up in cost basis for annuities.

For example: if a parent purchased a non-qualified annuity for $100,000 and it grew to $160,000, the $60,000 in gains is taxable income to the beneficiary when withdrawn. Planning distributions to stay within lower tax brackets – rather than taking a lump sum – can significantly reduce the tax burden.

For a complete breakdown of annuity taxation, see our guide on how annuities are taxed.

Using an Annuity to Protect an Inheritance You Receive in Cash

If you inherit cash, a brokerage account, or real estate (converted to cash at sale), you have complete flexibility in how to deploy it. The most common annuity strategies for inherited cash:

What Not to Do With an Inherited Sum

A few common mistakes when receiving an inheritance that an annuity can help prevent:

• Parking it in a low-yield savings account “temporarily” – temporary becomes permanent; a MYGA earns 4-5x more with the same safety
• Investing the full amount in equities while grieving – market volatility during emotional vulnerability leads to panic-selling
• Distributing it to family members – gifting above the annual exclusion ($18,000 per person in 2024) triggers gift tax reporting; annuitizing first creates a defensible structure
• Rushing the decision – a short-term MYGA or money market account buys time without locking you into anything permanent

For a broader view of how annuities fit into a retirement income plan, see our guide to annuities in a retirement income plan.