If I bequeath my 401k or IRA to my children, will they have to pay inheritance tax also?

Question

Followup to answer to "Can $12000 per year per child be gifted without inheritance tax even if the money comes from an IRA or 401k?"

Is it state specific?

Answer 1

yes they will pay tax on it.

Answer 2

You can only give your tax-deferred retirement funds to your children as an inheritance, not as a gift when you're still alive, so the $12,000 limit on gifts doesn't enter into it at all.

If there's a federal inheritance tax, the estate will pay it - there will only be inheritance tax if the estate is over $2 million. Your children won't pay the inheritance tax. But if they inherit the money still in an IRA or 401K, they'll have to pay income tax on the money when they take it out.

Answer 3

The value of the 401k/IRAs will be part of your estate. The estate tax is based on the assets you own on the day you die. (Currently you would have to have more than $2 million in assets to incur an estate tax at the federal level). Most states do not have an inheritance tax.

Whether the tax-deferred retirement money is left to the estate or directly to the beneficiaries, the income tax must still be paid. This is income at both the federal and state level.

Answer 4

If your have a 401k/IRA when you die, they are considered part of your estate, regardless of who is beneficiary.

So normal estate tax rules apply. Remember, though, you get $1M+ exempt from estate tax, depending on the year you die. So if your estate is less than $1M, you do not have to worry about estate taxes.

However, your children may have to pay *income* tax, which is a totally separate issue. The rules on this will differ between a 401k and IRAs.

Answer 5

They will not have to pay inheritance tax on it if, and only if, they are named beneficiaries on the account. And, if you are married, your spouse is automatically the beneficiary so he/she will need to sign over the rights to the money. When you die, the account will be taxable to them as regular income tax if they take it as cash rather than rolling it over (which is now an option).

This is not state specific.