Are IRAs Subject to Estate Tax & How Are They Taxed?

An Individual Retirement Arrangement (IRA) is a tax-advantaged savings account, while the federal estate tax is levied on the transfer of a person’s property after death. How an inherited IRA is treated involves both estate tax law and income tax regulations, which apply differently to these accounts.

IRA Inclusion in the Gross Estate

To determine if federal estate tax is owed, a decedent’s gross estate must be calculated. The Internal Revenue Code requires that all property owned at death, including the full value of any traditional or Roth IRAs, be included in this calculation. It is a common misconception that Roth IRAs are exempt from estate tax because contributions are made with after-tax money; however, both Roth and traditional IRAs are includable assets.

The IRA’s fair market value on the date of death is what gets reported on the federal estate tax return, Form 706. Including the IRA in the gross estate is a required step in calculating total assets and does not automatically mean that tax will be due.

Federal and State Estate Tax Exemptions

Although an IRA is part of the gross estate, most estates do not pay federal estate tax due to a large exemption. For 2025, the federal estate tax exemption is $13.99 million per individual, with a top tax rate of 40% on assets exceeding this amount. An individual can pass away with assets up to this value without incurring federal estate tax.

For married couples, the exemption is doubled to $27.98 million for 2025 through “portability,” which allows a surviving spouse to use their deceased spouse’s unused exemption. To use portability, the surviving spouse must file a federal estate tax return for the deceased spouse and make the election.

It is important to note that under current law, this high federal exemption amount is scheduled to be cut roughly in half at the end of 2025. The future of the exemption amount beyond that date is a subject of legislative debate.

A distinction exists between federal and state taxes. Several states impose their own estate tax with much lower exemption thresholds, some as low as $1 million. An estate could be exempt from federal tax but still owe a state estate tax. A few states also have an inheritance tax, which is paid by the beneficiaries instead of the estate.

Income Tax Considerations for Beneficiaries

Beneficiaries of inherited IRAs must also consider income tax. Funds in a traditional IRA are considered “Income in Respect of a Decedent” (IRD), which is income the decedent had not yet paid taxes on. When a beneficiary takes a distribution from an inherited traditional IRA, it is taxable to them as ordinary income.

The timing of distributions is governed by rules updated by the SECURE Act of 2019. For most non-spouse beneficiaries, a 10-year rule requires them to withdraw the entire account balance by the end of the 10th year after the owner’s death. IRS regulations effective in 2025 clarify how this 10-year period is administered.

This rule replaced the former “stretch” provision for many beneficiaries. However, exceptions to the 10-year rule exist for “eligible designated beneficiaries,” such as the owner’s minor children, disabled individuals, and beneficiaries not more than 10 years younger than the decedent. These individuals may still take distributions over their life expectancy.

The IRD Deduction for Estate Taxes Paid

When an estate pays federal estate tax, including a traditional IRA can result in its value being taxed at the estate level and again as income to the beneficiary. To mitigate this, the tax code provides an income tax deduction for “Income in Respect of a Decedent” (IRD). This allows a beneficiary to claim an itemized deduction for the federal estate tax that was paid on the IRA assets.

The deduction is only available if federal estate tax was actually paid; it does not apply if the estate was below the exemption amount. This deduction is for federal estate taxes only, not state-level taxes.

The deduction is calculated by determining the estate tax with the IRD included and recalculating it without the IRD. The difference is the total IRD deduction, which is then allocated among beneficiaries based on the proportion of IRD they receive. Beneficiaries can claim their portion of the deduction on their income tax returns as they take distributions.

Spousal Beneficiary Rules

A surviving spouse who inherits an IRA has unique options unavailable to other beneficiaries. A primary option is the spousal rollover, which allows the surviving spouse to treat the inherited IRA as their own by rolling the assets directly into a new or existing IRA. This action allows for the continued tax-deferred growth of the assets.

By rolling over the IRA, the surviving spouse becomes the new owner and can make contributions and name their own beneficiaries. Required minimum distributions (RMDs) will be based on the surviving spouse’s age, not the deceased’s. This can be beneficial if the surviving spouse is younger, as it can delay the start of RMDs.

The spousal rollover also uses the unlimited marital deduction, which allows assets to pass from a deceased person to their U.S. citizen spouse without any federal estate tax. By executing a rollover, the IRA assets qualify for this deduction, deferring potential estate tax until the surviving spouse’s death. The alternative for a spouse is to treat the account as an inherited IRA, which would subject them to different distribution rules.