The short answer
A surviving spouse may be offered continuation, a lump sum, or scheduled payments, but the menu depends on the contract, ownership, and whether the annuity is qualified. Compare access, guarantees, deadlines, and the insurer's tax reporting before choosing.
Spousal continuation
Some nonqualified annuity contracts allow a surviving spouse to continue the contract as owner instead of triggering an immediate payout. The exact value, rider treatment, future beneficiary rights, and tax reporting come from the contract and the insurer's continuation process.
For an IRA annuity, the spouse may have retirement-account choices such as treating the IRA as their own or remaining a beneficiary. The IRS explains spouse and non-spouse paths in its IRA beneficiary RMD guidance.
Lump-sum payout
A lump sum ends the inherited contract and provides immediate liquidity. For a nonqualified deferred annuity, value above the decedent's investment in the contract is generally taxable income to the beneficiary under Revenue Ruling 2005-30. For a traditional qualified annuity, the taxable portion is generally ordinary income; IRS Publication 575 explains pension and annuity survivor treatment.
Immediate access can be useful, but the election may bunch income into one tax year and surrender continuing guarantees. Ask for the insurer's written taxable-gain and cost-basis figures before electing.
What “stretch” means after the SECURE Act
“Stretch” is an informal label, not one universal election. A spouse may qualify for life-expectancy treatment or other special timing choices under the required-minimum-distribution rules. A contract can offer fewer settlement methods than the tax code would otherwise permit.
The Treasury's 2024 final RMD regulations (T.D. 10001) apply for calendar years beginning on or after January 1, 2025. They address retirement plans, IRAs, IRA annuities, and beneficiaries. Confirm the owner's date of death, required beginning date, spouse's status, and year-of-death RMD before choosing a schedule.
How to compare the three paths
- Continuation: prioritize preserved deferral and contract features; verify fees, rider status, and future access.
- Lump sum: prioritize immediate control; model the current-year tax impact.
- Scheduled payments: spread cash flow and potentially taxable income; verify the deadline and whether the election can be changed.
Documents to gather before electing
- The full contract, endorsements, and most recent statement
- The beneficiary designation accepted by the insurer
- Qualified/nonqualified status and IRA or plan documents
- Investment in the contract, untaxed gain, and death-benefit calculation
- Every available payout form and its deadline
- Any required year-of-death distribution history
Frequently asked questions
Can a spouse keep an inherited annuity?
Often, but not always. Contract terms and the account type determine whether continuation, own-IRA treatment, or another beneficiary election is available.
Is spousal continuation the same as a tax-free rollover?
No. Continuation and rollover are different mechanisms; the applicable path depends on whether the annuity is nonqualified, held in an IRA, or held by another retirement plan.
Must a spouse use the 10-year rule?
Not in every case. Surviving spouses are eligible designated beneficiaries under the post-SECURE framework and may have special alternatives.