Discussion Forum Topic: Taxable Account vs. Inherited IRA (Part 1)

By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott

This week the Ed Slott IRA Discussion Forum featured a question about how inherited assets are taxed and treated. But are all inherited items the same? Does an IRA receive the same tax treatment as a taxable account? Keep reading to find out.

In general, when you inherit property (including taxable investment accounts) from a decedent, the tax provisions are very favorable. One benefit that you usually receive is a step-up in basis. The step-up in basis essentially looks at the asset as if you purchased it on the date of death. If those assets have appreciated since their original purchase, this can significantly reduce the tax owed when those assets are sold.

For example, let’s say you inherited ABC stock from your uncle. When your uncle bought the stock, it was worth $100; when he died it was worth $1,000. If you sold the stock three months later for $1,200, you would owe capital gains tax only on $200! ($1,200 sale price minus the $1,000 value when inherited).

You’ve only owed the stock 3 months though, so it must be a short-term capital gain right? Nope! Another favorable tax break for most inherited property is that it’s automatically given long-term capital gain treatment. These long-term gains are taxed at a maximum of 15%, while short-term capital gains are taxed at ordinary income rates (currently as high as 35%).

But what about IRAs? Do they get the same treatment? Find out next Friday in Part II.