Roth IRA vs. Taxable Brokerage Account: Which Is Better to Leave to Heirs?
Deciding where to hold long-term savings rarely involves thinking about who eventually inherits the account, but the tax treatment an heir receives can differ substantially depending on which type of account the money sits in.
The short answer
A Roth IRA generally passes to heirs with future withdrawals free of income tax, though it must usually be emptied within a set number of years. A taxable brokerage account generally gets a “step-up” in cost basis at death, which can erase capital gains tax on growth that happened before the original owner died. Both can be attractive to leave behind, but they solve different tax problems.
How an inherited Roth IRA is typically taxed
Heirs of a Roth IRA generally don’t owe income tax on qualified withdrawals, since the account was funded with money that was already taxed before it went in. The tradeoff is the distribution timeline: most non-spouse beneficiaries are required to draw the account down within a set number of years under current inherited IRA rules, rather than being able to hold it indefinitely. The money comes out tax-free, but it can’t stay invested inside the account forever.
How an inherited taxable account is typically taxed
A regular taxable brokerage account works differently. When the original owner dies, the cost basis of the investments inside it is generally adjusted, or “stepped up,” to the value on the date of death under current step-up in basis rules. That means if an heir sells the investments soon after inheriting them, there may be little or no capital gains tax owed on the growth that happened during the original owner’s lifetime — only gains that accrue after the inheritance are typically taxed. Unlike a Roth IRA, there’s generally no required distribution schedule forcing the account to be liquidated.
Weighing the two side by side
- Tax-free growth versus tax-free basis reset. A Roth IRA offers tax-free withdrawals throughout its life, while a taxable account offers a one-time basis reset that specifically benefits appreciated investments.
- Distribution timeline differs. A Roth IRA inherited by a non-spouse generally has a required emptying period; a taxable account generally does not.
- Flexibility during the original owner’s life. A taxable account has no contribution limits and no required withdrawals for the original owner, while a Roth IRA has both, set by rules that can change over time.
- What happens with continued growth. Investments left in an inherited taxable account continue accruing gains that are taxable to the heir going forward, while inherited Roth IRA growth generally remains untaxed.
Why “better” depends on the assets and the heir
An account holding investments with large unrealized gains may lean toward favoring the step-up benefit of a taxable account, since that basis reset can eliminate a meaningful tax bill in one stroke. An account intended to grow tax-free for decades, or one an heir plans to leave invested rather than cash out quickly, may lean toward the ongoing tax-free treatment a Roth IRA offers. The comparison also depends on the heir’s own tax situation and how each account type is treated going forward.
What to weigh
Neither account type is universally the stronger choice to leave behind — the step-up benefit rewards accounts with large built-in gains, while the Roth IRA rewards long, tax-free compounding. Comparing this to how a traditional IRA stacks up against the same taxable account rounds out the picture for anyone weighing where new savings should go.