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Is an IRA Taxable As Part of an Estate?

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IRA estate planning

Estate planning should accomplish several inter-related goals. Along with ensuring your estate is distributed according to your wishes after you are gone, your estate plan should protect your assets while you are alive and minimize or eliminate estate taxes at your death. Your retirement plan should also work in harmony with your estate plan. If you own an IRA, you need to understand that the IRA probably will be taxed as part of your estate when you die. Our IRA estate planning attorneys at Parman & Easterday will explain what happens to your IRA after you are gone and whether it will be counted as part of your estate assets.

What Happens to Your IRA When You Die?

When a participant in a retirement plan dies, the remaining benefits are usually paid to the participant’s designated beneficiary in accordance with the terms of the plan (lump-sum distribution or an annuity).

Many retirement plans require you to name your spouse as the beneficiary unless he/she signs a form allowing you to name someone else. The Employee Retirement Income Security Act (ERISA) protects surviving spouses of deceased participants who had earned a vested pension benefit before their death. The nature of the protection depends on the type of plan and whether the participant dies before or after payment of the pension benefit has begun, otherwise known as the annuity starting date.

Assets held in a retirement account can be paid out to the beneficiary shortly after the owner’s death because retirement accounts are “non-probate” assets, meaning they bypass the probate process. Depending upon the type of plan, and whether the participant died before or after retirement payments had started, the plan administrator should provide the beneficiary with the following information once the beneficiary submits a certified death certificate:

  • the amount and form of benefits (in other words, lump sum or installment payments under an annuity);
  • whether death benefit payments from the plan may be rolled over into another retirement plan; and
  • if a rollover is possible, the method and time period in which the rollover must be made.

Your IRA and Federal Gift and Estate Tax

Every U. S. taxpayer’s gross estate is potentially subject to federal gift and estate taxes at the time of death. The gift and estate tax  is a tax on the transfer of wealth. Your gross estate includes anything of value you own at your death, including retirement accounts such as IRAs. For estate tax purposes, whether your IRA is a traditional or Roth IRA is irrelevant.  Fortunately, each taxpayer is entitled to make use of his or her lifetime exemption to reduce the amount of gift and estate taxes owed. ATRA set the lifetime exemption amount at $5 million, to be adjusted for inflation each year. For 2018, the lifetime exemption amount would have been $5.49 million for an individual and $10,980,000 for a married couple; however, President Trump signed tax legislation into law that increased the lifetime exemption amount for 2018 and several years to come to $11,200,000 for individuals and $22,400,000 for married couples. These exemption amounts are scheduled to increase with inflation each year until January 1, 2026, when the exemption amounts will revert to the 2017 levels, adjusted for inflation.  This is  all dependent on Congress leaving the current tax structure in place until then, which isn’t very likely.  For now, the lifetime exemption may reduce your taxable estate enough that your estate will not owe taxes; however, you need to include the value of your IRA in the total value of your gross estate in case your estate does end up owing estate taxes.

Beneficiary Options and Taxes

If you inherit a traditional IRA from your spouse, you normally have three choices:

  • Treat it as your own IRA by designating yourself as the account owner.
  • Treat it as your own by rolling it over into a traditional IRA, or to the extent it is taxable, into a:
    • Qualified employer plan
    • Qualified employee annuity plan (section 403(a) plan)
    • Tax-sheltered annuity plan (section 403(b) plan)
    • Deferred compensation plan of a state or local government (section 457(b) plan), or
    • Treat yourself as the beneficiary rather than treating the IRA as your own.

If you inherit an IRA from someone other than your spouse, you cannot treat it as your own. This means you cannot make any contributions to the IRA or roll over any amounts into or out of the inherited IRA.

A beneficiary of a traditional IRA will generally not owe tax on the assets in the IRA until the beneficiary begins receiving distributions from it.

As a general rule, the entire interest in a Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner’s death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary. If paid as an annuity, the entire interest must be payable over a period not greater than the designated beneficiary’s life expectancy and distributions must begin before the end of the calendar year following the year of death.

If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own.

Contact IRA Estate Planning Attorneys

For additional information, please join us for an upcoming FREE seminar. If you have questions or concerns regarding how an IRA is handled during probate or the tax ramifications of inheriting an IRA,  contact the experienced IRA estate planning attorneys at Parman & Easterday by calling 405-843-6100 to schedule your appointment today.

Larry Parman, Attorney at Law
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