Discussion Forum Topic: Taxable Account vs. Inherited IRA (Part 2)

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

CLICK HERE for Part 1 from last Friday.

There is no step-up in basis for inherited IRAs. This is always the case, regardless of the IRA’s investments. If, though, the IRA owner had made after-tax contributions to the account during their life, there can be existing basis that would pass to you. Simply put, basis can be transferred at death, but basis cannot be created.

Inherited IRAs are taxed in a similar manner as Traditional IRAs. As long as assets are held in the account, they grow tax-deferred. When the assets are distributed (either as required minimum distributions or elective withdrawals), they are added to your taxable income for the year and are taxed at your marginal rate.

For example, say your Uncle had contributed the same $100 to a traditional IRA during his life that had grown to $1,000 by the time of his death. Three months later the account was worth $1,200 when you withdrew the proceeds. This time, you would owe regular income tax on the entire amount. That’s a pretty stark contrast to our previous example!

It’s a good idea to remember that IRAs are different from other types of accounts in many ways. The treatment they receive after death is just one example that highlights those differences. If you have a specific question, it’s always best to consult with a knowledgeable advisor first to make sure you are aware of all the rules.

Do you have any more questions? Want to see what other people are asking? Check out the Ed Slott IRA Discussion Forum.