Inherited IRA distributions are generally not taxable as personal income in Pennsylvania. The state’s 3.07% personal income tax does not apply to withdrawals from an inherited Traditional or Roth IRA, regardless of the amount. That exemption, however, does not cover everything a beneficiary owes. The IRA itself may be subject to Pennsylvania inheritance tax based on the account owner’s age at death, and the IRS still taxes distributions from an inherited Traditional IRA as ordinary income at the federal level.
Pennsylvania Personal Income Tax on the Distributions
Pennsylvania excludes payments from IRAs, 401(k)s, 403(b)s, and pension plans from the state’s flat 3.07% personal income tax.1Commonwealth of Pennsylvania. Personal Income Tax Rates The exclusion applies whether you inherited a Traditional or Roth account, and it applies no matter how large the distribution is. A $50,000 withdrawal from an inherited Traditional IRA generates no Pennsylvania income tax liability.
The plan has to qualify under state law as a recognized retirement arrangement, but standard IRAs and employer-sponsored plans all meet that test. If you hold an unusual arrangement, confirm its status with the Department of Revenue before you file.
Federal Income Tax Still Applies
The IRS treats distributions from an inherited Traditional IRA as ordinary taxable income in the year you receive them.2Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts The amount is added to your other income and taxed at your federal marginal rate, which for most beneficiaries is higher than Pennsylvania’s flat rate would be. If the original owner made nondeductible contributions, the portion of each distribution representing that after-tax basis is not taxed again.3Internal Revenue Service. Publication 590-B – Distributions From Individual Retirement Arrangements
Inherited Roth IRAs are treated more favorably. Qualified distributions, meaning the original owner held the account for at least five years, are generally tax-free at the federal level.
The 10-Year Rule
Most non-spouse beneficiaries who inherited an IRA after 2019 must empty the account within 10 years of the original owner’s death. This rule comes from the SECURE Act and replaced the older stretch provision that let beneficiaries spread distributions over their lifetime.4Office of the Law Revision Counsel. 26 U.S. Code 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans If the original owner had already begun required minimum distributions before death, the beneficiary must also take annual distributions during the 10-year window rather than wait and withdraw everything at the end.
Several categories of beneficiaries are exempt from the 10-year rule and may still stretch distributions over their own life expectancy:
- Surviving spouses
- Minor children of the decedent, until they reach the age of majority, after which the 10-year clock starts
- Disabled or chronically ill individuals
- Beneficiaries who are not more than 10 years younger than the decedent
Because Pennsylvania does not tax these withdrawals as income, the 10-year rule carries no state income tax consequence. It can create a large federal bill, though, if you let the balance sit and then withdraw everything in year ten. Spreading the distributions out over several tax years usually lowers the federal cost.
Pennsylvania Inheritance Tax on the IRA Itself
Separate from income tax, Pennsylvania may impose inheritance tax on the value of the IRA you receive. Whether the account is taxed depends on whether the decedent could have accessed the funds without penalty during their lifetime.5Commonwealth of Pennsylvania. 61 Pa. Code 93.131 – Payments From Employment Benefit Plans and Life Insurance Contracts
- If the decedent was under age 59½ at death, a Traditional IRA is generally exempt from Pennsylvania inheritance tax. The 10% federal early-withdrawal penalty means the owner lacked penalty-free access.
- If the decedent was 59½ or older, the full value of a Traditional IRA is subject to inheritance tax because the owner could have withdrawn freely.
The Department of Revenue has confirmed this age-based framework.6Pennsylvania Department of Revenue. Is a Decedent’s IRA or 401K Subject to PA Inheritance Tax One exception: a disabled decedent’s IRA may be taxable even if death occurred before age 59½.
When the account is taxable, the rate depends on your relationship to the decedent:7Department of Revenue | Commonwealth of Pennsylvania. Inheritance Tax
- Surviving spouse, or parent inheriting from a child aged 21 or younger: 0%
- Children, grandchildren, and other lineal descendants: 4.5%
- Siblings: 12%
- Nieces, nephews, friends, and other unrelated beneficiaries: 15%
- Qualifying charities, exempt institutions, and government entities: fully exempt
Roth IRAs Are Split Between Contributions and Earnings
Pennsylvania treats Traditional and Roth IRAs differently for inheritance tax. The Department of Revenue separates a Roth account into contributions and earnings:6Pennsylvania Department of Revenue. Is a Decedent’s IRA or 401K Subject to PA Inheritance Tax
- Roth contributions are always subject to inheritance tax, regardless of the decedent’s age, because Roth contributions can be withdrawn at any time without penalty.
- Roth earnings are generally not subject to inheritance tax when the decedent could not have withdrawn them penalty-free. A 10% penalty applies to Roth earnings withdrawn before age 59½ or before the account meets the five-year holding requirement, so those earnings are treated as exempt in that situation.
If you inherit a Roth IRA from someone who died before age 59½, ask the financial institution to break out contributions and earnings as of the date of death. Only the contribution portion goes on the inheritance tax return.
Where the Decedent Lived Controls
Pennsylvania inheritance tax follows the decedent’s residence, not the beneficiary’s. If the IRA owner was a Pennsylvania resident at death, the account is subject to PA inheritance tax no matter where you live or where the account is held. If the owner lived in another state, Pennsylvania generally does not tax the IRA even if you are a PA resident. Non-resident decedents are taxed only on real property and tangible personal property physically located in Pennsylvania, and an IRA is intangible personal property.8Justia Forms. REV-1737-A Inheritance Tax Return – Nonresident Decedent
Beneficiaries living outside Pennsylvania should check their own state’s rules. Some states do tax inherited retirement distributions as income, and a few impose their own inheritance or estate taxes.
Filing the Inheritance Tax Return
If the IRA is subject to Pennsylvania inheritance tax, report it on Form REV-1500, the Inheritance Tax Return for Resident Decedents, using Schedule G for beneficiary-designated and non-probate assets.9Pennsylvania Department of Revenue. REV-1500 Pennsylvania Inheritance Tax Return Resident Decedent You will need the fair market value as of the date of death, the account number and institution, the decedent’s age at death, and a contribution-versus-earnings breakdown for any Roth account. File with the Register of Wills in the county where the decedent lived; that office forwards the return and payment to the state.10Commonwealth of Pennsylvania. Make an Inheritance Tax Payment
The return and payment are due within nine months of the date of death. Pay within three months and Pennsylvania gives a 5% discount on the tax owed. On a $200,000 IRA taxed at the 4.5% lineal rate, that discount saves $450. Miss the nine-month deadline and the penalty is 25% of the tax due or $1,000, whichever is less, with interest on unpaid tax accruing separately.