Inheritance tax on the Individual Retirement Accounts of a Pennsylvania decedent depends on the owner's age at the time of death and who inherits the IRA. A spouse inheriting the IRA no matter the age of the decedent does not pay tax, but other beneficiaries may owe tax on the amount.
Regular IRAs and Roth IRAs
An individual opens the IRA himself, and may have several IRA accounts, either traditional or Roth. Both IRAs allow the same maximum annual contribution rates of $5,000 per year with those over age 50 permitted to contribute another $1,000 annually. Traditional IRA contributors cannot contribute to these accounts once past the age of 70 1/2, and must start withdrawals at that date if not already doing so. Roth IRAs do not have age limits or mandated withdrawal ages. However, those with incomes over certain limits cannot contribute to the Roth IRA.
IRAs Are Subject to Tax
By federal law, IRA contributors cannot take withdrawals from the accounts without penalty until reaching the age of 59 1/2. In Pennsylvania, an IRA of an owner dying before 59 1/2 is not subject to inheritance tax, but the IRA of a decedent over age 59 1/2 at the time of death is liable for inheritance tax. This does not include IRA accounts left to the spouse. The inheritance tax rate depends on the relationship of the beneficiary to the decedent, as per Pennsylvania inheritance tax law.
Pennsylvania Inheritance Tax Rates
At the time of publication, the Pennsylvania inheritance tax rate is 4.5 percent for transfers to direct descendants such as children or grandchildren, 12 percent for siblings and 15 percent for any other heir or beneficiary, with the exception of non-profit 501(c) 3 charitable organizations, tax-exempt institutions or agencies of the local, state or federal government. Marital property is exempt from tax. In 1995, Pennsylvania repealed the so-called widow's tax, or inheritance tax charged on property solely titled in the decedent's name that went to the spouse. Children under 21 years of age who receive an inheritance from a parent do not pay tax, but children above that age must pay 4.5 percent.
The same inheritance tax provisions hold true for another major retirement funding mechanism, the 401k. These plans, provided by the employer rather than self-directed like an IRA, are also not subject to inheritance tax when the owners die before reaching age 59 1/2. This rule applies for the 401k unless the plan's owner could have closed the plan in his lifetime. Usually, the right to close the plan does not accrue until the owner reaches the traditional retirement age between 62 and 65 years old. However, if the decedent had a disability at the time of death, both the IRA and 401k are taxable, no matter the decedent's age.
- Pennsylvania Department of Revenue: Is the Decedent's IRA or 401K Subject to PA Inheritance Tax if the Individual Dies Before Age 59 1/2?
- Pennsylvania Department of Revenue: Am I Required to Pay Inheritance Tax on an Ira I Inherited?
- Pennsylvania Department of Revenue. "Inheritance Tax." Accessed June 30, 2020.
- Kentucky Department of Revenue. "Inheritance & Estate Tax." Accessed June 30, 2020.
- Urban Institute and Brookings Institution Tax Policy Center. "How Do State Estate and Inheritance Taxes Work?" Accessed June 30, 2020.
- Internal Revenue Service. "Estate Tax." Accessed June 30, 2020.
- Internal Revenue Service. "Instructions for Form 706," Page 2. Accessed June 30, 2020.
- Internal Revenue Service. "401(k) Plan Overview." Accessed June 30, 2020.
- Internal Revenue Service. "Topic No. 451 Individual Retirement Arrangements (IRAs)." Accessed June 30, 2020.
- Iowa Department of Revenue. "Introduction to Iowa Inheritance Tax." Accessed June 30, 2020.
- Tax Foundation. "Does Your State Have an Estate or Inheritance Tax?" Accessed June 30, 2020.
- Comptroller of Maryland. "Filing the Estate Tax Return." Accessed June 30, 2020.
- New Jersey Treasury Division of Taxation. "The Domestic Partnership Act - New Jersey Income Tax/Inheritance Tax (2/18/04)." Accessed June 30, 2020.
- Nebraska Legislature. "Nebraska Revised Statute 77-2001." Accessed June 30, 2020.
Jane Meggitt has been a writer for more than 20 years. In addition to reporting for a major newspaper chain, she has been published in "Horse News," "Suburban Classic," "Hoof Beats," "Equine Journal" and other publications. She has a Bachelor of Arts in English from New York University and an Associate of Arts from the American Academy of Dramatics Arts, New York City.