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Funds with Step Up Basis on inheritance ??
Old 10-28-2020, 02:37 PM   #1
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Funds with Step Up Basis on inheritance ??

I understand Stock Funds in Taxable have a Step Up Basis & Bond Funds in Tax Deferred do not.

I wonder if these funds have a Step Up Basis on inheritance or not ?-

-VWIUX, Vanguard Intermediate Tax Exempt Fund in Taxable Account
-Any of the Vanguard Balanced Funds in Taxable vs Tax Deferred accounts like -
Wellesly VWIAX-40/60
Balanced Index -VBIAX -60/40
Life Strategy Funds
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Old 10-28-2020, 02:47 PM   #2
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I believe all the funds you list, under current rules, would be "stepped up" to their value on your day of death regardless of whether they were in a taxable or tax deferred account. The issue with tax deferred accounts is that non-Roth account withdrawals are taxed as ordinary income regardless of the basis. So, the step-up is moot.

I'm just a retired factory worker living on a fixed income here in the city. Wait for the more informed folks to chime in before drawing any conclusions.
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Old 10-28-2020, 03:38 PM   #3
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Step-up or not goes w/ the type of account (taxable vs tax-deferred) not the type of fund. https://finance.zacks.com/basis-inhe...iras-2711.html
IRAs can have basis but there is no step-up and often the basis is 0.
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Old 10-28-2020, 04:12 PM   #4
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So a taxable account no mater if it has Bonds or Stocks, has a step up basis upon death of the owner.
&
A Tax Deferred Account such as a IRA no matter it has Stocks or Bonds does not have a step Up Basis.

Does the same rule applies if the Persons/Beneficiaries inheriting can be children or a spouse. ?

Thank you
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Old 10-28-2020, 04:22 PM   #5
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Quote:
Originally Posted by rkser View Post
So a taxable account no mater if it has Bonds or Stocks, has a step up basis upon death of the owner.
&
A Tax Deferred Account such as a IRA no matter it has Stocks or Bonds does not have a step Up Basis.

Does the same rule applies if the Persons/Beneficiaries inheriting can be children or a spouse. ?

Thank you
can be a step up or step down, for instance if property has declined in value. It is all assets held by the TP not held in tax favored accounts.

Does not matter who inherits.
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Old 10-28-2020, 05:26 PM   #6
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There seems to be some confusion. Basis in a TIRA refers to dollars contributed that were not deductible. Basis in a non-tax deferred account refers to the price paid for the asset.

I believe that all withdrawals from an TIRA are taxed as ordinary income regardless of what you paid for the asset. But, if you made contributions to your TIRA that were not tax deductible, then those dollars can be withdrawn tax free. But note the difference in what "basis" means.
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Old 10-28-2020, 11:16 PM   #7
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With funds in a taxable account, the owner has been paying tax on the declared dividends and declared capital gain each year, so the step up in basis would be smaller than if the person held an ETF as no capital gains are paid until it is sold.
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Old 10-29-2020, 04:14 AM   #8
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I understand better now,

So in the case of Tax Exempt Bond Funds in a Taxable Account, there will not be any income tax but there will be Capital Gains. It does have Step Up in Basis on the owner's passing

It follows that in a tax deferred account(IRA), no matter it has Stocks/Bonds, we pay income taxes on withdrawal (or convert to Roth = Tax Free) & It does not have Step Up in Basis.

Thanks
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Old 10-29-2020, 07:20 AM   #9
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Quote:
Originally Posted by youbet View Post
There seems to be some confusion. Basis in a TIRA refers to dollars contributed that were not deductible. Basis in a non-tax deferred account refers to the price paid for the asset.

I believe that all withdrawals from an TIRA are taxed as ordinary income regardless of what you paid for the asset. But, if you made contributions to your TIRA that were not tax deductible, then those dollars can be withdrawn tax free. But note the difference in what "basis" means.
And to be clear, if you have non-deductible contributions to a tIRA, while a portion of withdrawals are not tax and the remainder ordinary income, the way it is calculated is proportional.... so if you have a $1m tIRA that you had made $100k of contributions to and you withdraw $50k.... 90% or $45k of the withdrawal is taxable and $5k is return of non-deductible contributions and not taxed.

There is a significant recordkeeping needed as a result, which is why I and many other people decided long ago not to make non-deductible contributions to a tIRA.
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Old 10-29-2020, 10:46 AM   #10
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On a related note but not exactly what the OP asked, be sure to familiarize yourself with the rules associated with inherited IRAs. Things are different depending on whether it is inherited by a spouse or not, and whether it was inherited before 2020.

See https://obliviousinvestor.com/inherited-ira-rules/
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Old 10-29-2020, 11:41 AM   #11
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Originally Posted by pb4uski View Post
it is calculated is proportional....
Correct. I didn't delve into that since it's not directly related to the thread.
Quote:

There is a significant recordkeeping needed as a result,
Actually, it's quick and simple. A few quick keystrokes into TurboTax every year and, presto, done. It's one area where our friends at the IRS have done a nice job of keeping things simple.
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Old 10-30-2020, 11:09 AM   #12
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Thanks a lot pb4uski & each participating Forum Member for your helpful input,

It is amazing how much help I & others get from this forum, the summed up information & the wisdom on this forum continues to teach/help me.

Yes, when young (& dumb) we had made some non deductible IRA contributions, the price we pay is we had to be on our Accountants tail every year to submit the Form 8606.
We are close to retirement now & we ourselves submit the 8606 with Turbo Tax .

Thank you !
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Old 10-30-2020, 11:39 AM   #13
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Originally Posted by youbet View Post
..
Actually, it's quick and simple. A few quick keystrokes into TurboTax every year and, presto, done. It's one area where our friends at the IRS have done a nice job of keeping things simple.
They didn't do a nice job to make it easy.

It's simple if you have tax software to carry over the values every year, but you still have to look up the present value to get the correct %.

The IRS could have made it simpler, by treating the money as Roth money, allow a person to declare when they are taking out the non-taxable amount, and move it to a ROTH or put in a regular account. Then the record keeping is even easier.
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