Inherited IRA and step-up in basis: taxes when you inherit investments

In depth7 min read · updated 2 November 2026 · 8 sources

When you inherit investments, two very different sets of rules apply. Stocks and funds in a taxable account receive a step-up in basis: the gains built up during the original owner's lifetime are never taxed as capital gains. An inherited IRA works the other way around: most heirs must empty it within ten years, and every dollar from a traditional account is taxed as income. This article explains both, the difference between gifting and inheriting, and how to plan the withdrawals.

Taxable accounts: the step-up in basis

For property acquired from someone who has died, the cost basis is generally the fair market value at the date of death (26 U.S.C. § 1014 1954). Whatever the stock or fund gained while the original owner held it is wiped out for income tax purposes. If the heir sells soon after, there is little or no capital gain; if the heir holds on, only the growth after the date of death is taxed later.

The step-up also works in reverse. An investment that is worth less than its purchase price at death gets a lower basis, a step-down, and the unrealized loss is lost. Investors who expect to leave assets to their heirs therefore have a reason to realize losses during their lifetime and to keep assets with large gains, an application of the rules in capital gains tax.

Gift now or inherit later

A gift during the giver's lifetime does not get a step-up. The recipient takes over the donor's adjusted basis; only if the market value at the time of the gift is below that basis does the lower market value apply when figuring a loss (IRS, basis FAQ 2026). For appreciated stock, that difference can be large.

For gift and estate tax itself, few families need to worry. In 2026, each person can give $19,000 per recipient per year without using any of the lifetime exemption, and the lifetime exemption for gifts and estates is $15 million per person (IRS inflation adjustments 2025). Still, the decision is rarely only about taxes. Poterba (1998) found that even among older households with large wealth, only about 45% made use of tax-free gifts during their lifetime; households with large unrealized capital gains, for whom the step-up matters most, gave less often. Kopczuk (2012) reviews the evidence that people value control over their own wealth and give for mixed motives.

Inherited retirement accounts: the 10-year rule

Retirement accounts do not get a step-up. Money in a traditional IRA or 401(k) has never been taxed, so the heir pays income tax on every withdrawal. Since the SECURE Act, most beneficiaries of an inherited IRA whose owner died after 2019 must withdraw the entire balance within ten years (IRS, RMD FAQs 2026). The old option of stretching withdrawals over the heir's own life expectancy remains only for eligible designated beneficiaries: a surviving spouse, a minor child of the owner, a disabled or chronically ill person, and a person not more than ten years younger than the owner (IRS, RMD FAQs 2026).

Within the ten years, the timing is partly up to the heir. Depending on whether the owner had already started required minimum distributions, annual withdrawals may also be required during the period; the details are in the IRS rules and with the account provider (IRS, required minimum distributions 2026). What remains in the account must be paid out by the end of the tenth year after the year of death.

An inherited Roth IRA is subject to the same ten-year rule, but the withdrawals are generally tax-free. Beneficiaries of Roth IRAs must follow the distribution rules even though the original owner had none (IRS, required minimum distributions 2026). That makes it attractive to leave a Roth account untouched until late in the ten-year period and let it grow.

Spreading the withdrawals

For a traditional inherited IRA, the order of withdrawals matters because income tax is progressive. Taking everything in one year pushes most of it into the top brackets, while equal yearly amounts keep it in the heir's normal brackets.

Spouses have more choices. A surviving spouse is one of the eligible designated beneficiaries and can, among other options, treat the inherited IRA as their own (IRS, RMD FAQs 2026). Which option is best depends on the spouse's age and need for the money; withdrawals before 59½ from an IRA treated as one's own can trigger the 10% additional tax (IRS Topic 557 2026).

Planning ahead as the owner

• Beneficiary forms: retirement accounts and many brokerage accounts pass by beneficiary designation, not by will; outdated forms are among the most common estate planning errors.
• Roth conversions: converting traditional money to Roth while the owner is in a low bracket can save heirs in higher brackets tax later; see Roth vs. traditional.
• Keep appreciated stock, spend other money first: assets with large gains get the step-up at death, cash and bonds do not benefit.
• Charitable giving from the IRA: money meant for charity is best taken from traditional accounts, because a charity pays no income tax, while heirs would.
• State taxes: some states have their own estate or inheritance tax with much lower thresholds than the federal exemption.

Common mistakes

• Cashing out an inherited IRA at once: the whole balance becomes taxable income in one year.
• Missing the ten-year deadline: money left in the account at the end can trigger the 25% excise tax for missed distributions (IRS, required minimum distributions 2026).
• Rolling an inherited IRA into one's own IRA: only a spouse can do that; other heirs must keep it as an inherited IRA.
• Selling inherited stock in a panic: with a step-up there is little tax on a sale, but also no tax reason to sell immediately.
• Gifting highly appreciated shares shortly before death: the recipient loses the step-up that an inheritance would have given.

This article explains general federal rules and is not tax or legal advice. Inheritance cases depend on the details: the date of death, the type of account and the beneficiary. Ask an estate attorney or tax professional, and the account provider, before acting.

This article explains a method; it is not investment or tax advice. Worked examples are simplified and rounded. All terms in the glossary.