Originally Posted by Scratchy
My apologies if the point I raise below has already been mentioned in this thread, I did not see it at a quick glance.
For non tax-advantaged accounts, the cost basis gets reset at the time of death of the owner. In a community property state, it gets reset upon the death of either spouse, leaving the surviving spouse with a new cost basis for all community property holdings.
So, for those who can foresee that much of their non tax-advantaged holdings would not be spent before they were passed on to their heirs, or surviving spouse, capital gains tax would be largely avoided.
There is no corresponding advantage for non Roth retirement accounts. Tax will be paid on those funds, including principal and gains, when they are withdrawn, whether by the original owner or the heirs.
The point being, the gains in non tax-advantaged accounts may actually never be taxed, in some cases. I anticipate largely spending money from my retirement accounts, and avoiding selling positions which have significant gains in my non-tax advantaged accounts, as this will be beneficial to my heirs.
This is what we are doing and I've written about it often. What happened was that we were living off of taxable and doing Roth conversions but the taxable equities were 200% of cost so the gains from selling taxable equities to raise cash for spending was getting in the way of Roth conversions. So we changed tacks and are leaving taxable alone to get a stepped up basis and gains become totally tax free and that leaves more room for Roth conversions. We have enough in Roths that are past the 5 years to use a portion of those for spending... so we have Roth conversions going in the back end of the toothpaste tube and Roth withdrawals for spending coming out the front end of the toothpaste tube.
We may also use some of those highly appreciated equities in the taxable account for charitable contributions.