Inheriting an IRA
If you are inheriting an IRA here are some special considerations:
When you inherit an IRA, the decedent’s IRA does not simply become yours. Rather, a new type of IRA account is created for the heir or beneficiary, called an inherited IRA. Special rules apply to inherited IRA, so it is best to consult with an experienced attorney or tax professional.
The inherited IRA is not a probate asset in Pennsylvania – however, that does not mean that Pennsylvania state inheritance tax is not due and owing on the transfer. If a direct lineal descendent inherits the IRA (for example a child of the deceased), the state inheritance tax rate is 4.5 percent. There is no widow’s tax in Pennsylvania at this time, meaning that a surviving spouse does not have to pay PA inheritance tax on an inherited IRA. However, other taxes, such as income tax may have to be paid.
The type of IRA matters. You are probably aware that there are two common types of IRAs – a Roth IRA and a traditional IRA. The income taxes on the money placed in a Roth IRA have already been paid by the decedent. So, in many cases there is no income tax ramification to the heir if they properly take distribution of an inherited Roth IRA. A traditional IRA can be the more common type however. The decedent did not pay income taxes on the money placed into the traditional IRA, so the income taxes will have to be paid when the IRA money is disbursed to the heir.
Can the beneficiary let the money sit in the inherited IRA indefinitely? This might seem like a good idea. After all, the decedent had the funds in an IRA, why not just keep them in there if the funds are not immediately needed? However, the answer is that the beneficiary, often a spouse or child of the decedent, cannot always keep the funds in the inherited IRA and may be required to disburse the funds within five years unless certain conditions are met. Surviving spouses can often roll over the IRA into their own IRA. However, non-spouse beneficiaries may not roll over assets into their own IRA. Each unique situation should be reviewed by a tax professional.
David M. Tkacik, Esq. is an attorney based in Wexford, Pennsylvania assisting clients with the probate of estates. He can be reached at 412-414-9644 or Dtkacik@tkaciklawoffice.com.