Help me undertstand tax consequences of inheriting annuity

[YouAreTheFocus]

A great uncle passed away about 2 yrs ago, and had named me, among many others, as a beneficiary on an annuity. It is a fairly small amount, and I am tempted to just take it as a lump sum and be done with it. What sort of tax consequences would I be looking at for this? What other (better?) options do I have to defer or reduce the taxes?

FYI I was told part of it is nonqualified, and this portion would not be taxed, but the remainder would be taxed. Is it possible to take the nonqualified portion out tax free and roll over the remainder into...something...to reduce/defer taxes on that part?

I inherited an annuity once before, but rolled it into a stretch annuity to avoid taxes. It seems like too much time has passed for me to do that this time.

Thanks--I have been trying to read up on this and if anything am now more confused!

[SummerBaby]

I inherited several annuities last year from my aunt. I believe mine were "qualified" meaning my aunt did not pay tax on the interest it earned. Her earnings were treated as income to me. Her principal investment that I received when I cashed out was not taxable to me. In other words, say the annuity was purchased in 2000 for $1000. At the time of death in 2014, it was worth $5000. You cash out and receive $5000, but the original investment of $1000 is not taxed. You would however owe federal income tax on the $4000. The annuity company will withhold for you.

That's just federal income tax. Depending on your state and the state in which your uncle died, you may owe state income tax, estate tax and/ or inheritance tax. My aunt died in PA, which has a ridiculous inheritance tax law, so they took 15% of the cash out value of the annuities.

At least in my situation I was unable to avoid tax by keeping the annuity, and they were not earnin much interest anyway, so it was worth it to cash out. You may want to contact an accountant in your state so you can get a better idea of the tax implications. It really is complicated.