On Form 706, you report an IRA on Schedule I (Annuities) – this is the only correct place to list retirement accounts on the federal estate tax return.
According to IRS data, nearly 7% of estate tax returns get audited, and mistakes like misreporting an IRA can trigger hefty penalties (potentially thousands of dollars). Clearly, it pays to get this detail right to avoid unwanted IRS attention.
In this guide, you’ll learn:
- 📝 Exactly where to list an IRA on Form 706 – and why the IRS expects it there
- ⚠️ Common mistakes to avoid when reporting IRAs, so you don’t face penalties or delays
- 📊 Step-by-step examples of how to correctly include traditional and Roth IRAs on the estate tax return
- 💡 Key estate tax concepts (like gross estate, marital deduction, and beneficiary designations) that affect how IRAs are handled
- ❓ Quick answers to FAQs (state tax nuances, multiple IRAs, and more) to address any remaining questions
Where Exactly to Put an IRA on Form 706 (The Direct Answer)
The IRS Form 706 has several schedules for different asset types, and IRAs belong on Schedule I, titled “Annuities.” This might seem odd – an Individual Retirement Account isn’t literally an annuity in the everyday sense – but for estate tax purposes, retirement accounts are grouped with annuities and pension plans.
Schedule I is specifically designated for any interest the decedent had in annuities or certain retirement plans. A traditional IRA or Roth IRA held by the decedent at death must be included on this schedule at its full date-of-death value.
There is no separate line labeled “IRA” on Form 706. This lack of an explicit label causes confusion for many executors about where to report an IRA. If you list the IRA on a different schedule (like as cash or investments), it would be incorrect. The only correct placement is Schedule I.
It’s important to list each IRA account separately on Schedule I. For example, if the decedent had two IRAs at different financial institutions, enter each account as a separate item with its date-of-death value. You do not need to list every individual stock, bond, or fund held inside the IRA on the form – just the total account value. If necessary, attach an exhibit detailing the IRA’s holdings, but on the form each account can be a single line item.
Why IRAs Must Be Included: Understanding Form 706 and the Gross Estate
Form 706 is the United States Estate (and Generation-Skipping Transfer) Tax Return. It calculates the value of a decedent’s gross estate and determines if any estate tax is due. The gross estate includes all property in which the decedent had an interest at the time of death. This isn’t limited to just the assets that go through probate – it covers everything: real estate, bank accounts, stocks, life insurance payouts, and yes, retirement accounts like IRAs.
Many people are surprised that IRAs count, especially if the IRA named a beneficiary and thus bypassed the will. But for estate tax purposes, it doesn’t matter whether an asset goes through probate or passes directly to a beneficiary. If the decedent owned it, it’s part of the gross estate. An IRA is typically owned solely by the individual, so its entire balance as of the date of death is included in the estate’s valuation.
The IRS requires IRAs to be reported because they can represent significant wealth. A large IRA can push an estate’s value over the federal estate tax exemption (about $12.9 million for 2023, rising to $13.6 million for 2024).
Even if no estate tax will be owed (for instance, if the estate is under the limit or the IRA passes to a spouse), you must still report the account if you are filing Form 706. Failing to include an IRA could understate the estate’s value and potentially lead to an audit or penalties.
Legal basis: Under the tax law (specifically Internal Revenue Code § 2039), retirement accounts and other annuity-like assets are explicitly includable in the gross estate. Decades ago, there were certain exclusions for some approved pension plans or annuities, but those were eliminated for decedents after 1984. (The note on Schedule I – “no exclusion is allowed for decedents dying after December 31, 1984” – references that change.)
Today, virtually the entire balance of an IRA or retirement account is includible in the gross estate. One nuance: if the decedent had any after-tax contributions in a traditional IRA (basis), that portion isn’t taxed again as income to the heirs, but it doesn’t reduce the value included in the estate either. In essence, the estate counts the full value of the IRA, and any income-tax break for the beneficiaries (such as excluding already-taxed contributions or a deduction for estate tax paid on IRD) is handled separately through the income tax system.
Avoid These Mistakes When Reporting an IRA on Form 706
Even experienced executors and tax preparers can slip up when dealing with estate tax forms. Here are some common mistakes to avoid regarding IRAs on Form 706:
- Leaving the IRA Off the Return: Some assume that since an IRA has a designated beneficiary, it doesn’t need to be listed. This is incorrect. Always include the IRA’s value on Schedule I. Omitting it can misrepresent the estate’s size and lead to IRS follow-ups or a possible hefty penalty for failing to report an asset.
- Using the Wrong Schedule: It’s easy to mistakenly put an IRA on Schedule B (for stocks and bonds) or Schedule F (the catch-all for miscellaneous property) since an IRA might hold stocks or cash. However, the proper place is Schedule I. Misclassifying it can confuse the return and may raise red flags. Remember, the IRS expects to see retirement accounts on the annuities schedule.
- Not Claiming Applicable Deductions: If the IRA went to a surviving spouse or a charity, you should report it on Schedule I and also list it on the appropriate deduction schedule (Schedule M for the marital deduction to a spouse, or Schedule O for charitable bequests). A common mistake is to include the asset in the gross estate but forget to take the deduction, which results in overstating the taxable estate. For example, if a $500,000 IRA goes outright to a surviving spouse, you’d include $500,000 on Schedule I and also on Schedule M as a deduction, effectively removing it from the taxable estate. Forgetting to use Schedule M or O when appropriate is a costly error.
- Listing Individual Holdings Instead of the Account Value: You don’t need to (and shouldn’t) clutter the form by listing every stock or mutual fund held inside the IRA separately on Schedule I. Report the IRA as one item per account with its total value. Detailed listings of each security can be provided in an attached statement if necessary, but the form entry should be a single line per account. Overloading the form with minutiae is not only unnecessary but might cause confusion in processing.
- Incorrect Valuation Date: Make sure you use the date-of-death value (or the alternate valuation date if you elected that). IRAs fluctuate with the market, so using a statement from the wrong date can misstate the value. Get the exact date-of-death balance from the account custodian. Even a few days’ difference can significantly change an IRA’s value.
By steering clear of these pitfalls, you ensure your Form 706 is accurate and that you’re not paying more tax (or inviting an audit) due to avoidable mistakes.
Example: How to Report a Traditional IRA on Schedule I (Step by Step)
Let’s walk through a concrete example to illustrate the reporting process. Suppose Jane Doe passed away, and at her death she owned a traditional IRA worth $750,000 at Fidelity Investments (account number ending in 1234). The IRA’s designated beneficiary is her son. Here’s how the executor would report this on Form 706:
- Identify the IRA and its value: On the date of Jane’s death, the Fidelity IRA’s total market value was $750,000 (including all stocks, funds, and cash in the account). You don’t need to itemize each asset – just use the aggregate value.
- Locate Schedule I (Annuities): Schedule I is one of the asset schedules in Form 706. The executor will enter the IRA information on this schedule. Each item on Schedule I has a space for a description and for the value.
- Describe the IRA on Schedule I: In the description column, the executor might write something like: “Fidelity Investments Traditional IRA account #••••1234, owned by decedent – Beneficiary: John Doe (son)”. It’s good practice to indicate the type of account and maybe the beneficiary for clarity, though the form doesn’t require naming the beneficiary on the asset listing.
- Enter the value: In the value column for that line, the executor enters $750,000 (the value as of the date of death). This amount now becomes part of the gross estate total for Schedule I.
- Repeat if multiple accounts: If Jane had other retirement accounts or IRAs, each would get a similar entry on Schedule I, listed separately (e.g., “Vanguard Roth IRA account #••••4321 – value $200,000”). Each account is its own line item.
- Carry totals to the main form: After listing all annuities/retirement accounts on Schedule I, you’d total up the values at the bottom of that schedule. That total is then carried over to the summary on page 3 of Form 706 (the Gross Estate total in Part 5).
- Apply deductions if applicable: In Jane’s case, her IRA went to her son, so there’s no marital or charitable deduction for that $750,000; it remains in the taxable estate. However, if the IRA had gone to a surviving spouse, the executor would list that $750,000 on Schedule M to claim the marital deduction (removing it from the taxable estate). Similarly, if the IRA were left to a charity, the $750,000 would be listed on Schedule O as a charitable deduction.
Through this example, you can see that the process is straightforward once you know where to put the information. The key is that all retirement accounts funnel into Schedule I – whether it’s a 401(k), 403(b), pension, traditional IRA, or Roth IRA. In the end, for Jane Doe’s estate, the IRA would be properly accounted for on Schedule I and factored into the estate’s tax calculations.
The Law and Logic: Why Schedule I for IRAs?
You might wonder why the IRS decided to lump IRAs with annuities on Schedule I. The reasoning lies in how the tax code categorizes different types of income streams. IRAs, 401(k)s, and pensions are considered a form of “retirement annuity or plan” for estate tax purposes. Under IRC § 2039, any arrangement that provides payments or benefits to someone after the decedent’s death gets treated similarly. This includes life annuities from pension plans, deferred compensation contracts, and retirement accounts like IRAs.
In simpler terms, if the decedent had an arrangement where money would go to someone after they die (whether as a lump sum or periodic payments), that arrangement’s value generally goes on Schedule I. An IRA is basically a pot of money set aside for retirement that often continues to provide for beneficiaries after death, so it fits that description.
It also ensures that all wealth is accounted for. A person’s retirement savings might be one of their largest assets, and the IRS doesn’t want a huge IRA slipping by untallied. By placing IRAs on Schedule I, the form explicitly captures those retirement funds and groups them with other “income in respect of a decedent” assets, meaning the beneficiaries pay income tax on those assets even while the estate includes their full value for estate tax.
Understanding this context can help you remember why you’re reporting the IRA on Schedule I and not elsewhere. The form is structured to group like with like, and for IRAs, that group is annuities and retirement plans. There’s no special line for IRAs on the form, because Schedule I covers them under the umbrella of annuity-like assets.
Comparing Scenarios: Different Beneficiaries and Tax Outcomes
Not every IRA is handled the same way after it’s reported on Schedule I – it depends on who inherits it. The identity of the beneficiary doesn’t change where you report the IRA (it’s always on Schedule I), but it does affect other parts of the estate tax return and the estate’s tax outcome. Let’s compare a few common scenarios:
| Scenario | How to Report on Form 706 & Tax Outcome |
|---|---|
| IRA left to surviving spouse (e.g. decedent’s wife is beneficiary) | Report on Schedule I with its date-of-death value. Also list the same amount on Schedule M (Marital Deduction), because transfers to a U.S. citizen spouse are deductible. Result: Included in the gross estate but fully deducted, so no estate tax is due on it. The surviving spouse will still pay income tax on IRA withdrawals in the future (since it’s a traditional IRA), but the estate tax is eliminated due to the marital deduction. |
| IRA left to children (non-spouse) | Report on Schedule I with its value. No marital deduction applies. Result: The IRA’s value is part of the taxable estate, potentially causing estate tax if the total estate exceeds the exemption. The children will also owe income tax on distributions from the inherited IRA. |
| IRA left to a charity (charitable organization is beneficiary) | Report on Schedule I with its value. Also list the same amount on Schedule O (Charitable Deduction). Result: The IRA is included in the gross estate but then deducted as a charitable transfer, so no estate tax is due on that asset. Bonus: the charity, being tax-exempt, will not pay income tax on the IRA either – making this a very tax-efficient way to use an IRA for philanthropic goals. |
As you can see, the reporting on Schedule I is constant in each case – you always start by putting the IRA on Schedule I. The differences come afterwards: whether you also put the value on a deduction schedule, and ultimately whether any estate tax is due on that asset.
Another comparison is traditional vs. Roth IRAs. Both are reported identically on Schedule I. The only difference is that a Roth IRA’s beneficiary won’t owe income tax on distributions (whereas a traditional IRA’s beneficiary will), but that has no effect on the estate tax. In short, Roth IRAs are not exempt from estate tax – “tax-free” refers only to income tax, not to estate tax.
Lastly, if the estate itself is the beneficiary of the IRA (no living beneficiary was named), you still report it on Schedule I (e.g., “IRA payable to Estate of John Doe”) at full value. The entire account is included in the gross estate as usual. There’s no marital or charitable deduction unless the will directs those IRA funds to a spouse or charity. Naming the estate as beneficiary often forces a quicker payout of the IRA for income tax purposes, but that doesn’t change the estate tax reporting.
State Estate Tax Nuances: What About State Forms and IRAs?
State estate tax forms: Many states have an estate tax with their own version of Form 706. For example, New York requires Form ET-706 if an estate exceeds New York’s exemption (~$6.6 million). On these state forms, an IRA is included just like on the federal form (often under financial assets or annuities). In short, if you file a state estate tax return, don’t forget to include the IRA on it.
State exemptions are often much lower than the federal. This means states can tax estates that owe nothing federally. For instance, an estate worth $5 million (with a $1 million IRA) owes no federal estate tax (under the ~$12 million exemption), but it would trigger tax in a state like Massachusetts or Oregon (which have ~$1 million exemptions). In those states, that IRA can contribute to a substantial state tax bill even though the IRS wouldn’t require any payment.
State inheritance taxes: In states like Pennsylvania that impose an inheritance tax, the tax is based on who the beneficiary is. IRAs left to certain beneficiaries (like children) are typically taxable, while IRAs left to a spouse may be exempt. The reporting concept is similar – you list the IRA on the state inheritance tax return with its value and identify the beneficiary’s class (spouse, child, etc.). The bottom line is, include the IRA on any required state death-tax forms, just as you did on the federal Form 706.
(Always check your particular state’s rules, because each state can have its own nuances on exemptions and tax rates. But no state gives IRAs a free pass – if a state taxes estates or inheritances at all, an IRA will generally be included.)
Pros and Cons of DIY vs. Professional Help for Form 706
Filing an estate tax return with complex assets like IRAs can be challenging. Should you do it yourself or hire a professional (such as a CPA or estate attorney)? Here’s a quick look at the pros and cons of each approach:
| Option | Pros and Cons |
|---|---|
| Do-It-Yourself Preparation | Pros: Save on professional fees; you have intimate knowledge of the assets. Cons: Steep learning curve on tax laws; high risk of errors or omissions that could cost far more in penalties. It can also be very time-intensive to get it right. |
| Hire a Professional (Estate attorney or CPA) | Pros: Expertise ensures accurate reporting; they’ll catch nuances (like the correct placement of an IRA on Schedule I and proper use of deductions). Saves you time and provides peace of mind. Cons: Professional services come with fees; you’ll need to gather and share all relevant documents, and you must trust the advisor with sensitive information. |
If the estate is modest and well below the tax threshold (and you’re only filing Form 706 to elect portability of the exemption), you might consider the DIY route using the IRS instructions. However, if there’s any doubt, remember that estate taxes involve large amounts and complex rules.
One mistake could result in hefty penalties or a prolonged IRS audit. A qualified professional can catch nuances (like properly reporting an IRA on Schedule I and claiming all deductions) and save you time and stress. Form 706 is a one-time, high-stakes filing, so accuracy is crucial. In many cases, investing in expert help is worth it to ensure everything is done right.
Frequently Asked Questions (FAQs)
Q: Do I need to report an IRA on Form 706 even if it had a beneficiary?
A: Yes. Every IRA the decedent owned must be listed on Form 706, regardless of who the beneficiary is.
Q: Are Roth IRAs also included on Form 706?
A: Yes. Roth IRAs count the same as traditional IRAs. Their full value at death is included on Schedule I (“tax-free” only refers to income tax, not estate tax).
Q: If the estate’s total value is below the filing threshold, do I still need to file Form 706 because of the IRA?
A: No. If the total estate (with the IRA) is under the federal exemption and you’re not electing portability, you don’t need to file Form 706.
Q: Should I list each stock or fund inside the IRA separately on the return?
A: No. List each IRA account as one item with its total value. You don’t need to list individual holdings (attach a statement if you want detail).
Q: Are 401(k) and other retirement plans also reported on Schedule I?
A: Yes. Other retirement plans (401(k), 403(b), pensions, etc.) go on Schedule I, the same schedule used for IRAs.
Q: If a trust is the IRA’s beneficiary, do I report it differently?
A: No. You still list it on Schedule I (e.g. “IRA payable to [Trust Name]”) at full value. There’s no special treatment for trust beneficiaries.
Q: Does an IRA get a step-up in cost basis at death like stocks do?
A: No. IRAs do not receive a stepped-up tax basis at death. A traditional IRA is taxable to heirs on withdrawal (Roth is tax-free), but for estate tax you always include the full value.
Q: Will the beneficiary have to pay estate tax on an inherited IRA?
A: No. Estate tax comes out of the estate, not from individual heirs. Beneficiaries won’t get a separate estate tax bill (though traditional IRA withdrawals are still subject to income tax).
Q: Are IRAs subject to state inheritance or estate taxes?
A: Yes. In states that impose estate or inheritance tax, an IRA’s value is included like any other asset. State exemptions (for spouse, etc.) may apply, but you must report the IRA.