[Gigi3000]

Originally Posted by gpk111

Assumed fact pattern: You have inherited an annuity worth $360k with a $160k basis, so $200k is taxable. $160k is not taxable, assuming there is no estate tax.

Discussion #1: IMMEDIATE CASH. Take the tax hit and open bank account. Earn 0.5%. Complete safety. Tax hit is $200k times your incremental tax bracket. Maybe 15-20% if you have no base income. $200kX15% = $30k. $200X20%=$40k. Your arithmetic sounds off. Probably because you are not factoring in the non-taxable $160k. Annuity inheritances are taxed as ordinary income, not capital gains.

Discussion #2: CONSIDER PAYMENT OPTIONS. Talk to the existing insurance company and ask what your options are as a non-spousal beneficiary. You'll most likely find these options:
1. Cash (see above)
2. Partial payments not to stretch past 5 years if non-qualified and 10 years if qualified (this levels your taxes, since payments include both basis and earnings)
3. Possibly a conversion to an annuity which buys you lifetime income (Usually bad deals even if available to beneficiaries). Probably not available prior to paying taxes. Long shot, but worth asking about.

Discussion #3: CASH INVESTMENTS. Assuming you took the cash and paid the taxes, you are now facing investment decisions for the cash ($360k less say $40k of taxes = $320k). You can invest in stocks, bonds, annuities, or whatever you want, and none of those care what the source of your cash is. You can read thousands of threads on investments. Or you can consider Willie Nelson's philosophy: " I spend most of my money on whiskey and women.... and wasted the rest!" But I digress.
The point is that the source of your windfall has ABSOLUTELY NOTHING to do with your investment decision. The guy trying to sell you an annuity is confusing the issue. If YOU owned the annuity, you could roll it into another annuity via a 1035 exchange, but there is no way an inherited annuity can be transferred to you without paying taxes.

Discussion#4: MERITS OF ANNUITIES. I have done a lot of work on comparing annuities vs equity investments. I have opted for both. There are a lot of different annuity types. A pension is a type of annuity. So is a variable annuity with fees up to 4%. Don't listen to those who tell you to run as soon as you hear "annuities." Also don't listen to those who try to sell you annuities without explaining all the questions you may have or don't know to ask. ...and run from advisors who don't understand basic taxation law as it applies to inherited annuities.

PS If you're reasonably healthy, wait until 72 to tap your Social security, especially since you're got your inherited cash to fall back on.

How are you calculating the taxes again(on lump sum withdrawal)? What does the $160000 cost basis have to do with it? Cost basis was already taxed, right?