In my last article on retirement income in Pennsylvania, I mentioned that the Commonwealth is generous with retirement income and less generous with retirement accounts when they pass to the next generation. The natural follow-up question is: “So what will my kids actually owe on my IRA?”
It’s a fair question, and the answer is more knowable than most people expect. Pennsylvania’s inheritance tax has fixed rates, a fixed deadline and a few clear rules about retirement accounts. Here’s how it works.
The rates: it depends on who inherits
Pennsylvania doesn’t have an estate tax with a large exemption the way the federal government does. Instead, it has an inheritance tax that applies to most of what a resident leaves behind, and the rate depends on the relationship between you and the person receiving the money. According to the Pennsylvania Department of Revenue:
0% on transfers to a surviving spouse, and from a child aged 21 or younger to a parent
4.5% on transfers to direct descendants and other lineal heirs, which means your children, grandchildren and parents
12% on transfers to siblings
15% on transfers to everyone else, with charities, exempt institutions and government entities paying nothing
There is no large exemption; with a few exceptions, the tax applies from the first dollar.
Yes, IRAs and 401(k)s are generally included
This is the part that surprises families. Retirement accounts pass by beneficiary designation rather than through a will, so people assume they sit outside the inheritance tax. For most retirees, they don’t.
The Department of Revenue’s instructions for the inheritance tax return spell out the rule. An IRA is fully taxable if the owner was 59½ or older at death, or was considered disabled at any age. If the owner was younger than 59½ and not disabled, the IRA is not taxed. In plain terms: once you could have taken the money without a penalty, Pennsylvania treats it as yours to pass on.
Employer plans such as a 401(k) or 403(b) follow a related test. They’re exempt only when the owner did not have the right to possess, enjoy, assign or anticipate the payments. A pension where the retiree’s only rights were to name a beneficiary and receive a monthly check is not subject to the tax. But once you’ve retired and can draw on the account at will, it’s generally treated like an IRA. Annuities are fully taxable.
A few things that are not taxed: life insurance proceeds on the life of the person who died, and property owned jointly between spouses.
The catches worth knowing
The tax is figured on the full pre-tax balance. A traditional IRA has never been income-taxed. Your child will pay Pennsylvania inheritance tax on the whole account value, and then federal income tax on each dollar as it comes out. That’s two layers of tax on the same money, which is why beneficiary planning for retirement accounts deserves more attention than almost any other asset.
The federal clock starts at death. Under current IRS rules, most non-spouse beneficiaries must empty an inherited IRA or 401(k) by the end of the tenth year after the owner’s death, and every taxable dollar withdrawn is reported as ordinary income. Depending on whether the original owner had already started required distributions, withdrawals may be required along the way as well. A surviving spouse has more flexibility, including the option to roll the account into an IRA in their own name. Certain other heirs, including a minor child, a disabled or chronically ill person, or someone not more than ten years younger than the owner, can also stretch distributions over a longer period.
The deadline is nine months, with a reward for moving faster. Pennsylvania inheritance tax is due at death and becomes delinquent nine months later. If the tax is paid within three months of death, a 5% discount is allowed. Families who know roughly what’s owed can prepay an estimate and lock in that discount while the estate is still being settled.
Roth doesn’t change the inheritance tax. A Roth IRA is still an IRA for Pennsylvania purposes. What a Roth changes is the federal side: withdrawals of contributions from an inherited Roth are tax-free, and earnings are generally tax-free as well once the account has been open five years. So a Roth conversion during your lifetime doesn’t shrink the 4.5%, but it can meaningfully shrink the income tax your children face on what they withdraw. Whether that’s worth doing depends on your bracket today versus theirs tomorrow.
A hypothetical illustration
Consider a retired couple in Sewickley. The husband dies first, leaving his traditional IRA to his wife. Pennsylvania inheritance tax on that transfer is 0%, and she rolls the account into an IRA in her own name.
Years later she passes away at 81, leaving the IRA equally to their two adult children. Now the lineal rate applies. For every $100,000 in the account, the children owe $4,500 in Pennsylvania inheritance tax, or $4,275 if it’s paid within three months of her death. The children then have ten years to withdraw the account, and each withdrawal is added to their federal taxable income in the year they take it. The daughter, still in her peak earning years, may take smaller amounts now and more after she retires; her semi-retired brother may do the opposite.
This example is hypothetical and for illustration only. It does not represent any actual client, and your situation will differ.
What this means for your plan
Most of the value here comes from decisions made while you’re living, not afterward.
Check the beneficiary forms, not just the will. Retirement accounts go to whoever is named on the form, regardless of what the will says. I regularly see forms that still name a former spouse, a deceased parent or no one at all, and an account with no named beneficiary can lose much of the federal flexibility described above.
Think about the order of inheritance. Because a surviving spouse pays 0% and can keep the account in their own name, the first death is usually straightforward. The real tax event is often the second one, and knowing that in advance lets you plan for it.
Match the asset to the heir. A charity named as beneficiary on a traditional IRA pays no Pennsylvania inheritance tax and no federal income tax, while your children could receive assets that carry less tax baggage. Life insurance, which is exempt from the inheritance tax, is sometimes used to offset what the heirs will owe. The right mix depends on your goals, but the tools exist.
Be realistic about trusts. Trusts solve real problems: control over timing, a steadier hand for a child who is young or going through a divorce, continuity if you become incapacitated. I walked through the basics in What Assets Should You Put in a Trust?. But a trust is not, by itself, a way around Pennsylvania’s inheritance tax, and naming one as the beneficiary of a retirement account has federal consequences that deserve an estate attorney’s review.
Coordinate the withdrawals with the rest of your income. If you’re the one inheriting, the ten-year window gives you choices. Taking withdrawals in lower-income years can change the outcome considerably. It’s the same sequencing conversation I described in The Basics of Planning for Monthly Retirement Income, just applied to an inherited account.
If your retirement accounts make up a large share of what you’ll leave behind, it’s worth sitting down and looking at the beneficiary designations, the likely tax at each generation and the options for softening it. That review is part of our process, and you can reach out here to start the conversation. There’s no obligation; the first meeting is simply about understanding where things stand.
Frequently asked questions
Does Pennsylvania tax inherited IRAs?
Generally yes. An IRA is fully subject to Pennsylvania inheritance tax if the owner was 59½ or older at death or was disabled. The rate depends on who inherits: 0% for a surviving spouse, 4.5% for children and other lineal heirs, 12% for siblings and 15% for most other heirs.
What is the Pennsylvania inheritance tax rate for children?
Transfers to children, grandchildren and other lineal heirs are taxed at 4.5%. Transfers to a surviving spouse are taxed at 0%.
Is a 401(k) subject to Pennsylvania inheritance tax?
Often, yes. Employer plans are exempt only when the owner did not have the right to possess, assign or anticipate the payments. Once a retiree can draw on the account freely, it is generally taxable, like an IRA.
When is Pennsylvania inheritance tax due, and is there a discount?
The tax is due at death and becomes delinquent nine months later. If it is paid within three months of death, a 5% discount is allowed.
Do beneficiaries also pay federal income tax on an inherited IRA?
Yes. Taxable withdrawals from an inherited traditional IRA or 401(k) are reported as ordinary income on the beneficiary’s federal return, and most non-spouse beneficiaries must empty the account within ten years of the owner’s death. Inherited Roth IRA withdrawals are generally tax-free if the account has been open five years.
Sources: Pennsylvania Department of Revenue, Inheritance Tax (pa.gov) and REV-1500 Inheritance Tax Return instructions, Schedule G (REV-1510); Internal Revenue Service, Retirement Topics – Beneficiary. Tax rules change; figures are current as of publication.
Thank you,
Rob Holdcroft
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Three Cord True Wealth Management, LLC DBA Holdcroft Wealth Management, a registered investment advisor and separate entity from LPL Financial.
This material is for general information and educational purposes only and is not intended to provide specific investment, tax or legal advice. Tax laws and regulations are complex and subject to change. Please consult a qualified tax professional or attorney regarding your individual situation. Investing involves risk, including the possible loss of principal. No strategy assures success or protects against loss. The hypothetical example is for illustrative purposes only and is not representative of any specific situation; your results will vary.
