IRA’s (Individual Retirement Accounts) are retirement saving accounts created by law. Traditional IRA’s allow for your money to grow tax deferred, and minimum distributions (based on your life expectancy) begin at age 70 1/2. Roth IRA’s allow your money to grow tax free, and no minimum distributions are required.
When you pass on and you leave your IRA to a spouse, your spouse can elect to roll the IRA over into your own name, or take the IRA as an inherited IRA. If you are legally married in Pennsylvania, transfers of assets to a spouse upon your death means there is 0% Pennsylvania Inheritance Tax. Previously, there used to be a widows tax in Pennsylvania until 1994. Obviously, the law can change again, but bringing back the widows tax would surely be deeply unpopular across political lines. Bottom line is, for spouses, there should be no probate and no inheritance tax if your estate is setup properly. Domestic partners and non-married couples are taxed at 15% for Pennsylvania Inheritance Tax purposes.
If a child or non-spousal beneficiary inherits your IRA, they can elect to either take a lump sum distribution (not a good idea, as they pay ALL income taxes up front!) or keep it as a Beneficiary IRA. This is also known as a “stretch-out” IRA. IRA’s are non-probate assets, but they are subject to Pennsylvania Inheritance Tax (4.5% for children/grandchildren, 12% for siblings, 15% for all other non-spousal beneficiaries). Even if your beneficiary does not take a lump sum distribution at your death, they still must pay inheritance tax on the entire value of the IRA. If the IRA was worth $100,000, the would pay $4,500 at your death.
In Pennsylvania, all counties, including Philadelphia, Bucks County and Montgomery County all follow the same Pennsylvania Inheritance Tax code.
There are Pennsylvania Inheritance Tax savings strategies that our firm can assist you with. To schedule your consultation, please email firstname.lastname@example.org or call us at (215) 706-0200. We offer appointments at our Willow Grove, PA office, at your home or office. Want to learn more about estate planning? Check out our new Estate Planning 101 FREE Webinar!