If the original plan allows, you might be able to roll it over into a Roth in that case you’d need to pay income tax on what you roll over because the contributions would have been made before taxes. If you are a spousal beneficiary and can roll over the account into your own IRA, you won’t owe taxes until you make withdrawals in retirement. Generally, if you take a lump sum or ongoing payments, the money will be subject to federal and-depending on where you live-local and state income taxes. However, what you can ultimately do depends on a variety of factors, including your relationship to the account holder, your age in relation to theirs when they died, your own health and what the original account owner’s particular plan allows.

If you inherit a 401(k) or similar workplace retirement account, there are a few ways to receive the funds: You may be able to roll the account over to an IRA, take a single lump-sum cash distribution or withdraw money over time. Unlike in the past, now you may have just 10 years to withdraw all the assets from the account (though spouses may have more choices). The SECURE Act of 2019 changed the rules for inheriting IRAs and retirement plans. Besides that these accounts may be subject to estate taxes (if the estate is large enough), those who inherit them could face income taxes as well. However, things get a bit more complicated when it comes to inherited retirement accounts. If you live in one of the six states that charge inheritance tax and you’re not the spouse of the deceased, you’ll likely owe inheritance tax on what you receive. Surviving spouses don’t have to pay this tax at all.įortunately, you don’t have to worry about paying estate tax out of your own pocket since the federal (and sometimes state) government deducts that amount from the taxable estate before property is distributed to you. (Iowa plans to get rid of its inheritance tax in 2025.) The tax rate usually depends on the value of the inherited assets and the relationship of the heir to the deceased.įor example, the deceased’s children generally face a lower tax rate, while more distant relatives or unrelated beneficiaries pay the highest rates. The federal government doesn’t impose an inheritance tax, but a handful of states currently do: Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Iowa. The maximum tax rate any state charges is 20%.Īlso, assets passed on to spouses generally aren’t subject to federal or state estate taxes. Twelve states and the District of Columbia also charge estate taxes, though the sizes of the estates they exclude are much smaller-from about $1 million to $7 million. Based on the value of the estate, 18% to 40% federal estate tax brackets apply. As of 2021, only estates worth more than $11.7 million are taxed, and only on the amount that exceeds that number.

Most estate taxes are levied at the federal level-but many estates aren’t subject to them. By contrast, inheritance tax is what a beneficiary pays after they receive the assets they inherit. That’s before any wealth is passed on to beneficiaries.

Estate taxes are deducted from a person’s estate when they die. Though they both fall under the umbrella of “death taxes,” estate taxes and inheritance taxes aren’t the same. What’s the difference between estate and inheritance taxes?

States with inheritance tax