Please ensure Javascript is enabled for purposes of website accessibility

Ask a Fool: If I Leave My Retirement Savings to My Heirs, Will They Pay Estate Tax?

By Matthew Frankel, CFP® - Nov 8, 2019 at 12:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Most families won't have to pay estate tax.

Q: I'm in my 80s and have a substantial sum in retirement accounts that I plan to leave to my children. Will they have to pay estate taxes on it?

The answer depends on how on much you're planning to leave your heirs.

First off, retirement accounts such as 401(k)s, 403(b)s, traditional and Roth IRAs, and others are indeed a part of your taxable estate.

However, unless the total assets of your estate plus any taxable gifts you've already given exceed the lifetime exclusion amount, the IRS can't touch a penny. In 2019, this is $11,400,000, and in 2020, the exclusion is rising to $11,580,000. If you add up the entire value of your assets, only the amount in excess of the exclusion will be taxable. In other words, if you have a $12,000,000 estate and pass away in 2020, just $420,000 of your assets would be subject to estate taxes.

As another example, if your assets (including your retirement savings) add up to say, $5 million, your heirs won't have to pay any estate tax at all.

However, although they may not have to pay estate taxes, it's important to remember that withdrawals from most retirement accounts -- with the exception of Roth accounts -- will be considered taxable income. So, estate tax or not, if your heirs are in a relatively high tax bracket, inheriting your retirement savings could certainly add to their tax bill.

Lastly, it's also a good idea to check with your state. Some states have their own estate taxes and have lower exclusions than the IRS.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.