Who Pays Income Tax on Gains from Annuities During Accumulation Phase: Beneficiary or Deceased’s Estate?

When the annuitant dies during the accumulation phase of the annuity, the beneficiary receiving the death benefit:APays taxes based on the estate tax rate of the deceasedBPays income tax on any gains using the deceased’s income tax bracketCPays income tax on any gains at his or her own income tax rateDPays no income tax on any portion of the proceeds

C: Pays income tax on any gains at his or her own income tax rate

The correct answer is: B) Pays income tax on any gains using the deceased’s income tax bracket.

During the accumulation phase of an annuity, the annuitant is typically funding the annuity with regular payments, with the goal of accumulating assets and generating income that will be used in retirement. If the annuitant passes away during this time, the beneficiary would generally receive a death benefit, which may include the value of the annuity contract (including any gains), plus any additional death benefits if purchased.

However, regardless of how the death benefit is structured, the beneficiary would generally be responsible for paying income tax on any gains in the annuity. The tax rate that applies would depend on the deceased annuitant’s income tax bracket at the time of their death.

It is worth noting that if the annuity contract was funded with after-tax dollars (e.g., a Roth IRA annuity), then the beneficiary would not owe income tax on any portion of the proceeds received from the annuity contract. However, this is not typically the case with most annuity contracts.

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