Step Up! The Gain is Gone | Series 3.5

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Welcome to the enjoy more 30s family finance

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podcast. The only podcast dedicated to making life more

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enjoyable for young families by hitting on the financial topics

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that tend to weigh on us, stress us out, and distract our focus

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from simply enjoying life.

Joseph Okaly: 00:00:17

Hello, and welcome to the fifth episode of the Your

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Parents Money Mindset series. Last episode, we covered some of

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the potential headaches that can arise in inheriting assets and

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some great steps to avoid them ahead of time. Today's episode

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is titled step up, the gain is gone, where we'll cover some

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special rules as they currently exist that eliminates all the

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built up gains and the taxes that go along with it from

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certain inherited assets. I say 'as currently exist', because as

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of today's spring 2021 recording, the current

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administration is in the steps of proposing what would be very

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significant adjustments to the taxable gains code. If and when

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these get passed in the future, what is covered today would need

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to be adjusted potentially. You will learn today what you need

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to know about how the rule is situated currently, and what you

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can do and help your parents to be aware of to take full

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advantage of it. When I went to Disney with my wife, Lauren,

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before we had kids, it was way easier to move around. Two

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adults can fly around the parks, we hit pretty much everything

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over just two days. The one thing that can throw a wrench

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into the whole mix, though, is really long lines for the ride

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you want to get on. There is this one ride at Hollywood

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Studios called Toy Story Midway Mania, where you sit down in

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this cart that they have with 3d glasses on and spin around

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shooting in different carnival style games at the digital

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screens. The problem was when we got there, we hit one heck of a

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line. We were debating what to do, should we go somewhere else

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circle back around. All of a sudden kind of out of nowhere,

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this side door opened, a cast member asked how many were in

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our party, we answered two. And we were ushered through this

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door up the side entrance all the way to the front of the

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line. It was a beautiful thing.

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The current cost basis rules are kind of the same thing right

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now, where instead of skipping a line, you get to skip all the

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built up unrealized gains that may have accumulated over time.

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So what you need to know is first how the rules currently

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work. Let's say you bought ABC stock for $100. This is what

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they call your cost basis, which is just a fancy way of saying

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this is what you put in of your own money. You put in $100. So

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now let's say that ABC stock went up to $150. That means you

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gained 50, right? You put in 100, it's now 150, you gained

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50. However, you do not get taxed on this 50 until you

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actually sell ABC stock. So it's called an unrealized gain

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because you have not realized it yet since you haven't sold it.

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So where the stepped up basis rule comes into effect then is

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if you passed away. The person who inherited the stock gets to

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step up this basis or step up this assumed price that you

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originally paid for it to the current value. So they inherit

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the stock at the current price of 150 and we increase or step

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up that cost basis number for what you originally paid from

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the original 100 to the current price of 150 when you passed. So

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since your beneficiary's assumed cost is also now 150, just like

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the current price, if your beneficiary sold it today, there

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would be no tax at all paid on it. This whole concept is only

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applicable to non-retirement accounts. So just make sure

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that's clear. I'll say it again. It's only applicable to

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non-retirement accounts. IRAs, 401(k)s, annuities or any other

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retirement type of an account have their own taxation rules.

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And so the stepped up basis does not apply. So what you can do

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again is ask some great questions to your parents to

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make sure this is something they are aware of ahead of time. In

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general when supplementing income and retirement, the rule

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of thumb is to first take from your non-retirement accounts,

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then your tax deferred retirement accounts. And then

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from your tax free retirement accounts. So what that would

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look like is any joint or general individual account, so

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any non-retirement kind of account first, then from any of

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your traditional IRAs or 401(k)s basically any account that you

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put money into and you received the tax deduction when you did

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that. Then finally, from any Roth IRAs, or Roth 401(k)s,

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which are the ones that grow tax free. Again, as of today, your

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non-retirement accounts generally incur the least amount

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of tax, allowing your traditional IRAs and 401(k)s

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which are taxed at 100% as ordinary income, to delay taking

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any of those distributions. And finally, your Roth accounts that

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grow 100% tax free, to let those grow as long as possible. Now,

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everybody's situation is different. However, they may

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have multiple joint or individual non-retirement

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accounts to choose from. If you ask your parents questions such

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as 'Have you ever heard of this stepped up cost basis thing? Did

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you know that you have accounts that will receive this step up

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and basis and kind of forgive the tax? Do you consider the

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cost basis before you choose where you're supplementing your

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income from?' Then you can potentially open up a

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conversation to make sure they're aware of the current

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rules. My guess is that you'll be met with kind of blank

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stares. As always just provide the information for their own

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consideration unless they ask for direct input. But you can

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just say that, 'Hey, I was listening to this podcast on

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stepped up basis and so I wanted to pass it along because it

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could potentially avoid a lot of taxation when people are

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inheriting assets.' I'm sure they don't want to pay taxes to

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the government unnecessarily. So it again is just help for them.

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Their advisor should really already be considering all these

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items when creating a distribution plan for them, as

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maybe their joint account doesn't have a lot of built up

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gains, and therefore it should be distributed first, while

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their individual account might have a lot of built up gains so

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let's delay taking it from there. Because you know, if God

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forbid something happens, all the gains will get wiped away.

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So a quick summary from today is to be aware that the current

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rules again as of this spring 2021 recording are that

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non-retirement gains are essentially wiped away for the

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individual inheriting the non-retirement assets. The

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second thing is to make your parents aware of this through

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some of those general questions we touched on because quite

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frankly, we find very few people have had this explained to them.

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Thanks for tuning in today. As always, if you are able to

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implement what we can cover, then as always, that's

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fantastic. You have less to worry about than before and

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could focus more on just enjoying life. If you're wanting

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help with these things, though, or have questions you need help

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in clarifying, check out the Ask Joe section on the show's

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website. www.enjoymore30s.com that's enjoy more three zero

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s.com. If you enjoyed this episode specifically, please

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make sure to subscribe and review us on Apple podcasts or

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wherever you listen. There are literally millions of young

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American families out there I'm trying to reach and help just

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like you. Clicking a star, leaving a review it really does

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make a big difference. The next episode is Inheriting IRAs, More

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Limited Options, where we're going to cover some recent tax

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code adjustments that have been approved that drastically

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changed your options when inheriting an IRA from your

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parents, and what your parents can potentially do ahead of time

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to try and minimize the total long term taxes that will be

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paid because of it. Until next week. Thanks for joining me

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today and I look forward to connecting with you again soon.

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The conversations on this show are

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Joe's opinions and provided for general information purposes

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only. They do not constitute accounting, legal tax or other

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professional advice for your specific situation. You should

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always seek appropriate advice from a financial advisor,

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accountant, lawyer or other professional before acting upon

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any content or information found here first, Joe is affiliated

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with New Horizons Wealth Management LLC, a branch office

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of TFS Securities Inc and TFS Advisory Services an SEC

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registered investment advisor member FINRA/SIPC.