How the Über-Wealthy Benefit from Investing Outside Retirement Plans (And How You Can Too)

Authors

Sergio Pareja

Abstract

Current law incentivizes the use of traditional retirement plans, but those plans may not actually produce the best long-term tax situation for the taxpayer. The stepped-up basis at death does not apply to what is known as “income in respect of a decedent” (IRD). Generally, IRD is income that cannot be assigned from one person to another for income tax purposes. This includes pre-tax income set aside in a traditional employer-sponsored retirement plan, such as a 401(k) plan, as well as contributions to a deductible individual retirement account (IRA). Thus, stock held within a traditional employer-sponsored retirement plan or a deductible IRA is not eligible for the basis step-up at death, while stock held outside those plans is eligible for the unlimited stepped-up basis at death. Thus, über-wealthy families who tend to own the majority of their assets outside of retirement plans qualify for the basis step-up, while middle class families who strive to improve their future by diligently saving through a deductible IRA or 401(k) plan will not qualify for the basis step-up at death. This Article attempts to redress this aspect of the inequitable income tax treatment of families’ income by proposing that capital assets held inside a deductible IRA or qualified retirement plan should qualify for the unlimited basis step-up in the same way that they would qualify if they were owned outside an IRA or retirement plan.

Recommended Citation

Sergio Pareja, How the Über-Wealthy Benefit from Investing Outside Retirement Plans (And How You Can Too), 64 Cath. U. L. Rev. 563 (2015).
Available at: https://scholarship.law.edu/lawreview/vol64/iss3/5