From 24/7 Wall St. · David Beren · · 1m 30s
Spend $40,000 From IRA vs Brokerage for Kids
Retirees choosing between IRA and brokerage accounts face a tax trap for heirs.
In brief
Retirees choosing between IRA and brokerage accounts face a tax trap for heirs. Retirees spending $40,000 yearly from IRA first leave $300,000 brokerage account untouched, so kids inherit it tax-free with step-up basis but face a ten-year tax bill if brokerage is spent first. Originally reported by 24/7 Wall St..
Retiree's Tax Account Choice
A retiree with a tax-deferred IRA and $300,000 taxable brokerage account needs $40,000 yearly.
Standard Advice vs Tax Reality
Standard advice says spend taxable money first to let IRA grow tax-deferred, but tax bill determines inheritance.
Inherited Brokerage Gains Disappear
Inherited brokerage gains disappear with step-up basis, so children inherit tax-free appreciation.
Inherited IRA Has Ten-Year Deadline
Inherited IRA must be emptied by the end of the 10th year after death, except for surviving spouses.
Tax Bill Difference
Spending brokerage first leaves $300,000 IRA balance, adding $30,000 taxable income per year for heirs.
Tax Impact for Heirs
For a married heir in the 22% federal bracket, spending brokerage first adds $6,600 yearly tax bill over ten years.
When IRA Spending Wins
Retirees with lower tax rates benefit from IRA spending first, as it avoids step-up basis loss.
Three Numbers to Check
Brokerage cost basis, heir's tax bracket gap, and retiree's 12% bracket room decide the order.
Tax Trap for Heirs
Spending brokerage first creates a ten-year tax bill for heirs, erasing all gains.
The essence
Retirees spending $40,000 yearly from IRA first leave $300,000 brokerage account untouched, so kids inherit it tax-free with step-up basis but face a ten-year tax bill if brokerage is spent first.
