Which Bucket Should Retirees Tap First, for Their Heirs' Sake?

Does it make more sense to pull money out of your Roth IRA or your brokerage account for your income? Consider the full picture when deciding whether to hold onto your taxable investments for the potential future step-up in basis.

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If you have a brokerage account, you’re probably familiar with the concept of cost basis (the original price you paid for an investment). But when you pass away, an investment’s cost basis changes — instead, it assumes the investment’s value at the date of your death. This is known as a “step-up” in basis, and it effectively makes gains during the original owner’s lifetime tax free for his or her heirs.*

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FactorSituation that favors holding the taxable investment for the step-up
Investment cost basis (as percentage of value)Low cost basis (i.e., a large potential gain)
Your tax rate on capital gainsHigh capital gain tax rate
Your life expectancyShort life expectancy
Investment's dividend rateLow dividend

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Roger A. Young, CFP®
Senior Financial Planner, T. Rowe Price

Roger Young is Vice President and senior financial planner with T. Rowe Price Associates in Owings Mills, Md. Roger draws upon his previous experience as a financial adviser to share practical insights on retirement and personal finance topics of interest to individuals and advisers. He has master's degrees from Carnegie Mellon University and the University of Maryland, as well as a BBA in accounting from Loyola College (Md.).