As a general rule, Roth IRAs are good accounts to leave to loved ones. Distributions typically are tax-free, and if your heirs follow the rules, they can stretch distributions from a Roth over their lifetimes, allowing the bulk of the investment to continue growing tax-free. Other valuable assets to hand down are stocks, bonds and mutual funds in taxable accounts that have greatly appreciated in value. That’s because your heirs will enjoy a step-up in the cost basis on such assets, which could save them a bundle in capital-gains taxes. If you are tapping your taxable account for living expenses, focus on selling assets that will result in either a loss or a small capital gain, and preserve highly appreciated assets for heirs.
A tax-deferred retirement plan such as a traditional IRA or 401(k) is among the priciest of gifts for heirs to receive. With a traditional retirement plan, there is no step-up in basis and it all comes out at ordinary-income tax rates.
Wall Street Journal June 3, 2014
