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While IRAs are generally non-probate assets (not controlled by the decedent’s Will), IRAs, both traditional and Roth, may be subject to PA inheritance tax, (in addition to income tax for beneficiaries of traditional IRAs when drawn upon). If the decedent was over age 59-1/2 at the time of death, the IRA will be subject to PA inheritance tax. If the decedent was under age 59-1/2 at the time of death, the IRA will not be subject to inheritance tax. Where spouses are named beneficiaries of IRAs, the applicable inheritance tax rate is presently 0% and where children and grandchildren are beneficiaries, the rate is presently 4.5%. It is imperative that those with IRAs review them to ensure that the beneficiary designations, both primary and secondary, are complete and up to date.
Generally, when a spouse is the designated beneficiary of a traditional IRA, that spouse has the option to roll over the inherited IRA into the surviving spouse’s own IRA and thus able to defer payment of income tax until that spouse is age 70 1/2 then over that spouse’s lifetime as the inherited IRA proceeds are withdrawn. When children are beneficiaries, they typically have the option to i) roll the inherited IRA into a “stretch” IRA over the child’s lifetime or the lifetime of the oldest child if there are multiple child beneficiaries and begin taking required minimum distributions by December 31st of the year following the decedent’s death; ii) cash out the IRA over five (5) years (by December 31st of the fifth year following the IRA owner’s death) or ii) simply cash out the IRA in full following the IRA owner’s death. Each withdrawal will be included in that beneficiary’s taxable income during the year the funds are withdrawn.
Please note that Congress is considering legislation to limit the length of a stretch IRA for non-spouse beneficiaries to ten (10) years after the original IRA owner’s death, as opposed to the lifetime of that non-spouse beneficiary.
For many of us, IRAs are a significant part of our retirement holdings and appropriate attention must be paid to proper and complete beneficiary designation. For those beneficiaries inheriting IRAs, it is important to be aware of available options following the IRA owner’s death. The Estates Practice Group at Gross McGinley can answer any questions you may have about IRAs and counsel you on IRA holdings and distributions to ensure your intent and wishes are followed.
Attorney Thomas A. Capehart provides guidance on wills, estate planning, real estate, and elder law matters.