During the Participant's Life

Tax on contributions to a qualified plan—as well as the investment buildup—is deferred but not eliminated. Any withdrawals are subject to income tax, except for the portion that derives from after-tax contributions.

Note: Withdrawals from a Roth IRA are not subject to income tax if the account has been in place more than five years and if made after the age of 59½. However, contributions to a Roth IRA are not deductible.

At the Participant's Death

Accumulations are potentially subject to a double federal tax at the death of the participant.

Estate Tax

The entire value of a plan's assets at a participant's death is includible in his or her gross estate. However, any benefits passing to a surviving spouse as a lump-sum distribution, through certain trust arrangements, or as the continuation of a withdrawal plan started during the participant's life are sheltered from taxation by the marital deduction.

In community-property states, only the participant's one-half interest in a plan's assets is includible in his or her estate. That one-half is sheltered by the marital deduction, so the tax consequence is essentially the same as for the other states.

If the plan's assets pass to persons other than a spouse—children, for instance—they are subject to estate tax, payable from the participant's estate.

Income Tax

Generally, plan assets are included in the gross income of designated beneficiaries when received. If they are paid in a lump sum (other than to an IRA for the surviving spouse), the entire sum would be taxed at once, though income averaging may be available. Even so, they may push the beneficiary into a higher tax bracket. When plan benefits are paid in installments rather than as a lump sum, each installment as received is taxable income to the recipient.

If the participant's estate has paid estate tax on plan assets, the beneficiary can take an income-tax deduction for the net federal estate tax paid on the distribution received. This will reduce somewhat the total income tax payable. The combination of the federal estate and income taxes can consume a significant portion of your retirement-plan assets.

For more information

To learn more about the taxation of retirement assets, please contact our Office of Major and Planned Giving.