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