Regular IRAs and Roth IRAs

• An individual opens the IRA himself, and may have several IRA accounts, either traditional or Roth. Both IRAs allow the same maximum annual contribution rates of $5,000 per year with those over age 50 permitted to contribute another $1,000 annually. Traditional IRA contributors cannot contribute to these accounts once past the age of 70 1/2, and must start withdrawals at that date if not already doing so. Roth IRAs do not have age limits or mandated withdrawal ages. However, those with incomes over certain limits cannot contribute to the Roth IRA.
  
  

IRAs Are Subject to Tax

• By federal law, IRA contributors cannot take withdrawals from the accounts without penalty until reaching the age of 59 1/2. In Pennsylvania, an IRA of an owner dying before 59 1/2 is not subject to inheritance tax, but the IRA of a decedent over age 59 1/2 at the time of death is liable for inheritance tax. This does not include IRA accounts left to the spouse. The inheritance tax rate depends on the relationship of the beneficiary to the decedent, as per Pennsylvania inheritance tax law.
  
  

Pennsylvania Inheritance Tax Rates

• At the time of publication, the Pennsylvania inheritance tax rate is 4.5 percent for transfers to direct descendants such as children or grandchildren, 12 percent for siblings and 15 percent for any other heir or beneficiary, with the exception of non-profit 501(c) 3 charitable organizations, tax-exempt institutions or agencies of the local, state or federal government. Marital property is exempt from tax. In 1995, Pennsylvania repealed the so-called widow's tax, or inheritance tax charged on property solely titled in the decedent's name that went to the spouse. Children under 21 years of age who receive an inheritance from a parent do not pay tax, but children above that age must pay 4.5 percent.
  
  

Considerations

• The same inheritance tax provisions hold true for another major retirement funding mechanism, the 401k. These plans, provided by the employer rather than self-directed like an IRA, are also not subject to inheritance tax when the owners die before reaching age 59 1/2. This rule applies for the 401k unless the plan's owner could have closed the plan in his lifetime. Usually, the right to close the plan does not accrue until the owner reaches the traditional retirement age between 62 and 65 years old. However, if the decedent had a disability at the time of death, both the IRA and 401k are taxable, no matter the decedent's age.