05 Sep Is it better to inherit stocks or IRA?

Q. For Class A beneficiaries, is it better financially to inherit stocks from a taxable account or from an inherited IRA?
— Planning ahead

A. Your question bring up an important planning point.

When you assign beneficiaries to inherit your assets, it’s smart to understand what taxes might be assessed. This can vary depending on the kind of asset and how it’s passed from the deceased person to the beneficiary.

Because no tax has been paid on any assets in a traditional IRA, all withdrawals are taxed as ordinary income at the beneficiary’s tax rate, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.

On the other hand, Whitenack said, withdrawals from a non-IRA account are not taxed as ordinary income. Instead, they are valued as of the date of death for capital gains tax purposes.

“Those who inherit non-IRA assets will receive a step-up in the cost basis of those assets for purposes of calculating a loss or gain on the sale of those assets,” Whitenack said.

The stepped-up value is the fair market value rather than the original cost of the asset.

“As a result, if the assets are sold soon after death, there usually will be no gain on the sale and therefore, no income tax consequences in selling the assets,” she said. “Therefore, it generally is preferable to inherit stocks or cash from a non-IRA.”

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This post was originally published in September 2017.