The Tax-Smart Way to Leave Money to Your Heirs and to Charity
From 401(k)s and IRAs to stocks and bonds, your retirement savings accounts are taxed in different ways. So to make the most of your money, it makes sense to pass certain types of accounts to family and others to charity.


Do you want to leave a legacy to your family and your favorite non-profit? It’s a great idea that can benefit a lot of people — even more so if you do it right in terms of taxes.
Taxes apply differently to various types of investment accounts. For example, IRAs, 401(k)s and some other types of accounts are tax deductible at the front end. They are wonderful accumulation vehicles because they allow your money to grow without being taxed. But distribution is another story. Money withdrawn from those accounts can be considered ordinary income, which incurs the highest tax.
In contrast, non-retirement plans (non-IRA accounts) don’t help you to accumulate quite as much money, because you pay taxes on dividends and capital gains as they grow. The tax benefit to these accounts comes upon your death, when their worth is calculated using a “stepped-up basis.”

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What’s a stepped-up basis? To begin with, the IRS defines basis as "the amount of your investment in property for tax purposes. Use the basis of property to figure depreciation, amortization, depletion, and casualty losses. Also use it to figure gain or loss on the sale or other disposition of property." When using a stepped-up basis, the value of the account is not determined by the amount of money you originally paid for it, but by its worth on the date of your death.
For example, let’s say 30 years ago you bought a stock for $100, and it is now worth $100,000. If upon your death, your heirs sold it for $100,000, they would have no gain. Even though you made $99,900 on that lucky investment, since the date of death value ($100,000) is their basis, they made no profit and pay no taxes.
As you can imagine, your heirs would probably prefer to inherit non-IRA accounts, because they won’t be taxed. Qualified charities, on the other hand, don’t care which type of account you leave to them. Why? As non-profits, they won't pay taxes on any legacy you leave them.
So, if you want to leave money to your family and donate to charity, talk to a professional about willing your non-IRA taxable account to your heirs and your IRA to a non-profit, to maximize the good your financial legacy can do.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Ken Moraif is the CEO and founder of Retirement Planners of America (RPOA), a Dallas-based wealth management and investment firm with over $3.58 billion in assets under management and serving 6,635 households in 48 states (as of Dec. 31, 2023).
-
Prior Authorization Coming to Traditional Medicare Starting in 2026
The Centers for Medicare and Medicaid Services (CMS) will implement prior authorization requirements for certain traditional fee-for-service Medicare services in six states starting next year.
-
The 60-40 Portfolio Rule of Investing: Not Dead Yet?
Adding alternative investments to a balanced portfolio can smooth out returns.
-
The Hidden Costs of Caregiving: Crisis Goes Well Beyond Financial Issues
Many caregivers are drained emotionally as well as financially, leading to depression, burnout and depleted retirement prospects. What's to be done?
-
Cash Balance Plans: An Expert Guide to the High Earner's Secret Weapon for Retirement
Cash balance plans offer business owners and high-income professionals a powerful way to significantly boost retirement savings and reduce taxes.
-
Five Things You Can Learn From Jimmy Buffett's Estate Dispute
The dispute over Jimmy Buffett's estate highlights crucial lessons for the rest of us on trust creation, including the importance of co-trustee selection, proactive communication and options for conflict resolution.
-
I'm a Financial Adviser: For True Diversification, Think Beyond the Basic Stock-Bond Portfolio
Amid rising uncertainty and inflation, effective portfolio diversification needs to extend beyond just stocks and bonds to truly manage risk.
-
I'm a Retirement Psychologist: Money Won't Buy You Happiness in Your Life After Work
While financial security is crucial for retirement, the true 'retirement crisis' is often an emotional, psychological and social one. You need a plan beyond just money that includes purpose, structure and social connection.
-
Ask the Editor, July 4: Tax Questions on Inherited IRAs
Ask the Editor In this week's Ask the Editor Q&A, we answer tax questions from readers on the rules on inheriting IRAs.
-
Retiring Early? This Strategy Cuts Your Income Tax to Zero
When retiring early, married couples can use this little-known (and legitimate) strategy to take a six-figure income every year — tax-free.
-
Ditch the Golf Shoes: Your Retirement Needs a Side Gig
A side gig in retirement can help combat boredom, loneliness and the threat of inflation eroding your savings. And the earlier you start planning, the better.