22 Feb Which assets should I leave to my children?
Q. I have a 401(k) plan from years of working and I don’t think I will need any money from it because I’m living off income from my taxable investments. Would my kids be better off inheriting my 401(k) or my brokerage accounts?
A. Kudos to you for saving so well.
Different kinds of assets have different implications when you’re talking inheritances.
Generally, it is better to inherit money from a taxable account rather than from an IRA because of the step-up in basis at death, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.
Lynch offered this example: Imagine you bought AT&T stock at $10 per share in a brokerage account. When you die, it’s worth $50 per share. If your heirs sell it at $50 per share, they owe no income tax. If they sell it in future years, any gain above $50 per share is taxed at the capital gains rate, which Lynch said is about half of ordinary income tax rates.
Compare that to a traditional IRA, which has a cost basis of zero, meaning that all that money from a distribution is taxable as ordinary income, which Lynch said are the highest rates.
“One thing you may want to consider is converting these IRA assets into Roth assets,” Lynch said. “You would pay the tax today, however, you never have to make Required Minimum Distributions (RMDs) on Roth IRAs and your kids will inherit them income tax free.”
Also, he said, any additional gain after your death would be free of income tax.
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