Does an Inherited IRA Get a Step-Up in Basis? No — Here's What That Means for Your Taxes

One of the most consequential things you can understand when you inherit a parent's estate: inherited IRAs and inherited brokerage accounts are taxed in completely opposite ways. Getting this wrong can cost tens of thousands of dollars in avoidable taxes.

What is a step-up in basis?

When you inherit property — shares of stock, a house, a mutual fund — the property's cost basis is "stepped up" to its fair market value on the date of the decedent's death.¹ If your parent bought 1,000 shares of Apple in 2005 at $5 per share (total basis: $5,000) and those shares were worth $200,000 when they died in 2025, you inherit them with a basis of $200,000. The $195,000 of appreciation that occurred during your parent's lifetime is never taxed. If you sell the shares immediately for $200,000, you owe zero capital gains tax.

The step-up applies to appreciated property held in the decedent's taxable estate — brokerage accounts, individually held stocks, real estate, closely held business interests, and similar assets. The step-up is one of the most valuable features of the U.S. tax code for wealth transfer.

Why inherited IRAs don't qualify

IRAs have never been subject to capital gains treatment, and the step-up in basis rule under IRC § 1014 does not change that. Here's why:

• IRAs are income-tax-deferred accounts. Contributions to a traditional IRA were either deductible (reducing income when contributed) or grow tax-deferred. Either way, no income tax has ever been paid on the pre-tax contributions and all of the growth.
• Distributions are always ordinary income. Under IRC § 408(d)(1), IRA distributions are included in gross income as ordinary income — regardless of what the IRA is invested in. Even if the IRA holds stocks that have appreciated 500%, those gains do not qualify for capital gains rates. When the IRA distributes those gains to you, they are ordinary income.
• The step-up cannot apply to unrealized ordinary income. IRC § 1014 steps up the basis of "property" acquired from a decedent. But the IRA's value is not capital property in the hands of the beneficiary — it is deferred ordinary income. The step-up rule applies to capital assets in taxable accounts, not to income-tax-deferred retirement account balances.

The result: there is no point in the chain where the appreciation inside a traditional IRA converts to capital gains. The entire balance — contributions, deductible growth, earnings — is ordinary income when distributed, whether that happens in year 1 or year 10 of the SECURE Act depletion window.

The tax math: why this matters

Consider two people who each inherited $500,000 from a parent in 2025 — one inheriting a traditional IRA and one inheriting a taxable brokerage account. The difference in tax treatment is dramatic:

Two observations from this table that many people find surprising:

1. The brokerage account inherited tax-free can be sold immediately for zero gain. Because the step-up resets the basis to FMV at death, selling right after inheriting produces no taxable gain — and nothing owed to the IRS.
2. IRA distributions are NOT subject to the 3.8% Net Investment Income Tax (NIIT), even though capital gains from the brokerage account are. This partially offsets the ordinary-income-rate disadvantage for high earners, but does not come close to making up the difference.

The 2026 ordinary income rates on inherited IRA distributions

For reference, here are the 2026 federal tax brackets that apply to inherited IRA distributions (per IRS Rev. Proc. 2025-32):³

Single filers

Married filing jointly

The 2026 long-term capital gains rates are 0%, 15%, and 20%, with the 15% rate applying to the vast majority of middle-to-upper-middle income filers (roughly $49,450–$553,050 for single; $98,900–$613,700 for MFJ).⁴ The gap between, say, a 22% ordinary income rate on an inherited IRA distribution versus a 15% capital gains rate on a stepped-up brokerage account — with zero tax on the step-up itself — is enormous when compounded across a $500,000 to $2,000,000 inherited IRA.

Inherited Roth IRA: the better story

An inherited Roth IRA is the significant exception. Roth contributions were made with after-tax dollars. Qualified distributions from an inherited Roth IRA are income-tax-free — there is no ordinary income tax and no capital gains tax. While a Roth IRA also does not receive a formal "step-up" in basis (since Roth distributions are already tax-free, the concept does not apply in the same way), the practical effect is similar: you inherit an account whose growth is never taxed when distributed.

The 10-year depletion rule still applies to inherited Roth IRAs for non-eligible-designated beneficiaries — but because the distributions are tax-free, deferring to year 10 can actually maximize value. See the full rules: Inherited Roth IRA Guide.

After-tax contributions: the partial exception for traditional IRAs

If the decedent made non-deductible contributions to a traditional IRA (after-tax dollars that were never deducted), those contributions create a "basis" in the IRA that is inherited by the beneficiary. Distributions from the inherited IRA are then prorated between the taxable (pre-tax) portion and the non-taxable (after-tax basis) portion.

However, this is not a step-up — it is simply a return of the after-tax contributions. The "basis" was always there; it does not get reset to FMV at death. And for most traditional IRAs, the basis is zero because all contributions were deductible. This is tracked on IRS Form 8606 and must be specifically requested from the executor or estate. See the full guide: Inherited IRA After-Tax Basis and Form 8606.

Strategic asset sequencing when you inherit both types

Many beneficiaries inherit a "mixed estate" — both a traditional IRA and a taxable brokerage account. The common instinct is to "protect the IRA" by spending down the taxable account first and leaving the IRA to grow tax-deferred. This instinct is often wrong. Here is how to think through it:

The case for spending the inherited IRA first

• The inherited IRA has a mandatory 10-year deadline. Under the SECURE Act, most non-spouse beneficiaries must fully deplete the inherited IRA by December 31 of the 10th year after the decedent's death. You cannot "hold" the inherited IRA indefinitely like a taxable account. The taxable brokerage account has no depletion deadline.
• The taxable account grows with capital gains treatment. Future appreciation in the taxable account will be taxed at 0–20% long-term capital gains rates — or not at all if passed to your own heirs (who will receive their own step-up). The inherited IRA's distributions will always be ordinary income at 22–37%, no matter how long you wait within the 10-year window.
• Spending taxable assets now triggers capital gains; inherited IRA distributions don't change their tax character. If you sell appreciated positions in the taxable account to fund living expenses, you pay capital gains tax today. If you take equivalent distributions from the inherited IRA, you pay ordinary income tax today — but the remaining inherited IRA balance must still come out before year 10, and it will still be ordinary income. Selling taxable assets also eliminates their future capital gains preference.

When spending taxable assets first makes sense

• Your current income is very low (you're in the 0% capital gains bracket with taxable income below $49,450 single/$98,900 MFJ in 2026), and selling appreciated taxable assets generates no gain. In this case, crystalizing the step-up with zero-tax sales is powerful — but you still have to manage the inherited IRA distributions within the 10-year window.
• The taxable account has unrealized losses that can be harvested to offset other gains or income.
• Annual required minimum distributions from the inherited IRA (if the decedent was past their Required Beginning Date per T.D. 10001) force IRA distributions regardless of what else you choose — so the sequencing question is about optional distributions above the required minimum.

The default framework for a mixed estate

1. Take any mandatory annual RMDs from the inherited IRA (if required — depends on whether decedent was past RBD).
2. For discretionary spending beyond RMDs, compare the marginal income tax rate on an additional inherited IRA dollar versus the capital gains rate on a sold taxable position. In many cases, filling your current bracket with IRA distributions costs less than selling taxable assets that will generate gains.
3. Keep taxable assets growing or pass them to your own heirs — they will receive another step-up. The IRA's balance cannot escape ordinary income tax whenever it is distributed.
4. In years when your income is low (gap years, retirement before Social Security, temporary reduced income), accelerate inherited IRA distributions to fill lower brackets. Save the taxable assets for years when you might be in the 0% capital gains bracket.

Common misconceptions

1. "The IRA investments appreciate tax-free, so it's like a step-up." Tax-deferred growth inside the IRA is not the same as a step-up. Tax-deferred means you pay later, not never — and you pay at ordinary income rates, not capital gains. A step-up means you never pay tax on appreciation that occurred before death.
2. "My parent's IRA was invested in stocks, so I'll get capital gains rates." No. The nature of the investments inside the IRA does not change the tax character of distributions. An IRA holding Apple stock, index funds, or bonds all produce ordinary income distributions. Only taxable account positions get stepped-up basis and capital gains treatment on post-death appreciation.
3. "If I roll the inherited IRA into my own IRA, it will eventually get a step-up." Non-spouse beneficiaries cannot roll an inherited IRA into their own IRA — IRC § 408(d)(3)(C) prohibits it. Only surviving spouses have this option. And even a surviving spouse's rollover does not create a step-up — it simply converts the inherited IRA into their own IRA subject to their own RMD rules.
4. "I should hold the inherited IRA investments for long-term capital gains." The holding period of the underlying investments is irrelevant. Whether you hold an inherited IRA invested in stocks for 6 months or 10 years, the distributions are ordinary income. The SECURE Act 10-year rule means you cannot defer past year 10 regardless.

Sources

1. 26 U.S. Code § 1014 — Basis of property acquired from a decedent (LII / Cornell Law School). IRC § 1014 establishes the "step-up" rule: the basis of inherited property is the fair market value at the decedent's date of death. Applies to taxable estate assets. Does not apply to income in respect of a decedent (IRD) items such as traditional IRA balances, which are governed by IRC § 691 and § 408.
2. 26 U.S. Code § 1411 — Imposition of tax (Net Investment Income Tax) (LII / Cornell Law School). IRC § 1411(c)(1) defines net investment income; distributions from IRAs and qualified plans are explicitly excluded. Capital gains from taxable brokerage accounts are net investment income subject to 3.8% NIIT for taxpayers above the MAGI thresholds ($200K single / $250K MFJ).
3. IRS Revenue Procedure 2025-32 — 2026 Tax Inflation Adjustments. Official IRS source for 2026 ordinary income tax bracket thresholds, standard deduction amounts, and other inflation-adjusted figures cited in this guide. Verified May 2026.
4. Kiplinger — IRS Updates Capital Gains Tax Thresholds for 2026. 2026 long-term capital gains rate thresholds per Rev. Proc. 2025-32: 0% rate for MFJ up to $98,900; 15% rate from $98,900 to $613,700 MFJ; 20% rate above $613,700 MFJ. Single thresholds approximately $49,450 (0%/15% boundary) and $553,050 (15%/20% boundary). Cross-checked against IRS Rev. Proc. 2025-32.

Tax values verified as of May 2026 against IRS Rev. Proc. 2025-32 and Cornell Law School LII. IRC § 1014 (step-up in basis), § 408(d) (IRA ordinary income treatment), § 1411 (NIIT exclusion for IRA distributions), and § 691 (IRD) are permanent provisions with no current sunset. Consult a tax advisor for your specific situation.