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My understanding is that a Roth IRA can be inherited and the U.S. government doesn't put an inheritance tax on it.

Does that also apply to a Roth 401(k)? In other words, if I died, would my children inherit my Roth 401(k) without that 401(k) facing an inheritance tax?

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21

Well, no.

True, a Roth has no income tax. The tax was already paid on deposit and no more tax due.

But, the Roth, IRA or 401, still might be subject to estate tax, as it is still part of the estate for state and federal estate tax purposes. Keep in mind, the federal estate exemption is high, over $11M per decedent. State varies, by, well, state.

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Depending on whether the SECURE Act becomes law1, your children may be forced to withdraw from the Roth account faster than you might like. It changes the Required Minimum Distribution (RMD) rules.

As I understand it, the bill says a non-spousal inheritor must empty the account within 10 years of your death.

While not a tax per se, it makes your scheme somewhat less attractive.

1 As of this writing, the bill has passed the House of Representatives, but not the Senate.

2 As of this edit, the bill has passed the Senate as well.

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  • I'm curious as to what would happen if someone didn't empty the account within 10 years, where does this money go? Free money to the government which had already been paid for it? – GrumpyCrouton Jul 30 '19 at 13:08
  • @GrumpyCrouton my guess is the financial institution is required to disburse the remainder after the 10 years are up. – GOATNine Jul 30 '19 at 13:16
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    @GrumpyCrouton I think it would just become unclaimed property. Just because the owner hasn't withdrawn it doesn't mean it reverts to the account manager. – chepner Jul 30 '19 at 13:22
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    @GrumpyCrouton: The formal term for what chepner has mentioned is "escheatment". sec.gov/fast-answers/answersescheathtm.html – Ben Voigt Jul 30 '19 at 14:23
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    One can only roll into their own account the account of their deceased spouse (or divorced, if court ordered). A non-spouse inheritance must remain titled as an inherited acct. – JTP - Apologise to Monica♦ Jul 31 '19 at 1:39

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