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Do funds in a Roth IRA get the benefit of a stepped-up basis for my heirs when I die?
– Ed
No, the cost basis of the assets held within your IRA will not step up or reset to their current market value when you pass away. A step-up in basis only applies to assets and property held outside of retirement accounts. However, that’s really a non-issue because Roth IRA beneficiaries don’t pay taxes on qualified withdrawals from the account anyway. Let’s take a closer look at this topic.
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An investment’s basis is the starting point from which you calculate your gain for tax purposes. It’s generally the price you pay for something. But, if the purchase incurred transaction costs or expenses associated with making the purchase, you include those in your basis as well. Some examples of transaction costs that you include in the cost basis of an asset are commissions, recording fees and transfer fees.
This all determines whether you have a capital gain or loss when you – or your heirs – eventually sell the asset.
Here’s how it works:
Suppose you buy a stock for $125 per share – that’s your cost basis. If the stock goes up to $150 per share, your gain is $25 per share. If you sell the share, that $25 is taxable. However, it the stock falls to $100 per share and you sell it, you’ll record a $25 loss, which can potentially offset other capital gains. (If you need help planning around when to sell an investment, consider speaking with a financial advisor.)
The step-up in basis is a concept that applies when assets transfer to an heir upon a person’s death. Generally, the basis of an inherited asset “steps-up” to the fair market value on the date of death. This can lead to significant tax savings for beneficiaries.
For example, imagine that a 90-year old woman owns a piece of land that she bought 60 years ago for $10,000. Let’s assume the property is worth $180,000 today, which isn’t a stretch just considering historical inflation.
The owner has a basis of $10,000, which means her gain (unrealized until she sells the property) is $170,000. If the woman dies and leaves the land to a beneficiary, that beneficiary’s basis will step up to the current fair market value of $180,000. If that heir then sells the land for $180,000 they will have no taxable gain.
