First, know that there are 2 types on annuities from a tax perspective: Qualified, or non-qualified.

A qualified annuity means that the money was saved in a IRA or 401(k), and there were no taxes paid upfront. When you take money out of an inherited qualified annuity, the full amount withdrawn will be taxed at your ordinary income tax rate, which can be quite high.

Your options depend on your relationship to the person that passed away and inherited the annuity from. You will have a set time frame that you must withdrawal the assets from the annuity after the initial owners death.
If you are a surviving spouse, or a minor child, you have more flexibility here. But if not, you must follow IRS rules on the withdrawal. Because of the tax consequences of withdrawals from qualified annuities, this means you need to carefully plan on the best way to withdrawal from the account with the lowest amount in taxes paid.

Non-qualified annuities were funded with savings that already had taxes paid. You will still owe taxes on the growth of the annuity however.

It is also important to know that annuities can be exchanged as well. This is known as a 1035 exchange and allows you to move the money from a qualified or non-qualified annuity into a different annuity.
This can be a good option if the annuity you inherited has high fees, or is just not right for you.

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