Updated July 30, 2026. Quick answer: IRC §72(s) conditions annuity treatment on the contract requiring distribution after the holder’s death — the owner, who is not always the annuitant. Die before the annuity starting date and “the entire interest in such contract will be distributed within 5 years.” A surviving spouse can instead be treated as the holder and carry on. Any other beneficiary has a narrower route with a deadline that is easy to miss.
The two baseline rules in §72(s)(1)
A contract is not treated as an annuity contract unless it provides that “(A) if any holder … dies on or after the annuity starting date and before the entire interest … has been distributed, the remaining portion … will be distributed at least as rapidly as under the method of distributions being used as of the date of his death, and (B) if any holder … dies before the annuity starting date, the entire interest in such contract will be distributed within 5 years after the death of such holder.”
The dividing line is the annuity starting date. After it, payments simply continue at least as fast. Before it, there is a hard outer limit.
The two ways out of the five years
| Who the beneficiary is | What is available | The condition |
|---|---|---|
| The surviving spouse | §72(s)(3) applies (1) and (2) “by treating such spouse as the holder” | None beyond being the spouse. The contract effectively continues |
| Any other designated beneficiary | §72(s)(2): distribution over that beneficiary’s life, or a period not extending beyond their life expectancy | Distributions must BEGIN not later than 1 year after the holder’s death |
| No designated beneficiary | The §72(s)(1)(B) five-year rule | — |
The deadline that is missed most often. §72(s)(2)(C) requires that distributions begin within one year of the death — not that a decision be made within one year, and not that the paperwork be started. Miss it and the life-expectancy route is gone, leaving the five-year rule and a much more compressed block of ordinary income, since the gain comes out first either way. The window opens at the worst possible moment for attending to paperwork, which is precisely why it is worth knowing in advance.
Holder, not annuitant. §72(s) keys to the death of the holder. Where the owner and the annuitant are different people — common when a contract was bought for someone else’s benefit, or when an entity holds it — the event that starts the clock may not be the death anyone was watching for. It is worth confirming, in writing, exactly who the issuer records as holder, annuitant and beneficiary. Those three roles are frequently assumed to be two.
If the annuity sits inside an inherited retirement account rather than being a non-qualified contract, a different rulebook governs: see an annuity held inside an inherited IRA.
Sources
IRC §72(s)(1), §72(s)(2) and §72(s)(3), quoted verbatim. Retrieved from the United States Code, July 2026.
This states what the cited authority says about a non-qualified annuity — one bought with after-tax money outside a retirement plan — unless a page says otherwise. It is not tax, legal or investment advice. An annuity held inside an IRA or a qualified plan is governed by different provisions. This site states no surrender-charge schedule and no rider value, because both are terms of your particular contract rather than rules of law.