Step-Up in Basis
The adjustment of an inherited asset's cost basis to its fair market value at the date of the owner's death, potentially eliminating capital gains taxes on appreciation during the deceased's lifetime.
Understanding Step-Up in Basis
Step-up in basis is one of the most powerful estate planning tools available. Assets held in taxable accounts at death receive a stepped-up basis, meaning heirs can sell immediately with no capital gains tax on the inherited appreciation. However, assets in traditional IRAs and 401(k)s do NOT receive step-up in basis - they are fully taxable when withdrawn. Life insurance death benefits are income-tax-free without any basis consideration.
Why This Matters for Retirement: Understanding Step-Up in Basis is essential for making informed decisions about tax-free retirement income strategies. Whether you are evaluating an IUL policy, planning Roth conversions, or comparing retirement vehicles, this concept directly affects your outcomes.