Traditional IRA vs. Taxable Brokerage Account: Which Is Worse to Leave to Heirs?
The same tax break that makes a traditional IRA attractive to fund during working years can turn into a tax bill for whoever inherits it, which is why some planners treat it as a lower-priority asset to leave behind.
The short answer
Heirs of a traditional IRA generally owe ordinary income tax on withdrawals, since the money was never taxed going in. Heirs of a taxable brokerage account generally benefit from a basis reset at death that can reduce or eliminate capital gains tax on prior growth. Because of that difference, a traditional IRA is often considered a less tax-efficient asset to leave behind compared with a similarly sized taxable account.
Why a traditional IRA is taxed the way it is
Contributions to a traditional IRA are typically made with money that hasn’t yet been taxed, and the tradeoff for that upfront tax break is that withdrawals — by the original owner or an heir — are generally taxed as ordinary income. Under current inherited IRA rules, most non-spouse heirs must empty the account within a set number of years, and each withdrawal along the way adds to that year’s taxable income. A large traditional IRA inherited during a heir’s peak earning years can push a meaningful amount of income into higher tax brackets.
Why a taxable account often compares favorably
A regular taxable brokerage account doesn’t carry that same built-in tax liability. Investments inside it generally receive a step-up in basis at the original owner’s death, meaning the cost basis resets to the value on that date. An heir who sells soon afterward may owe little or no capital gains tax on growth that occurred before the inheritance, and there’s no forced distribution schedule requiring the account to be liquidated on any particular timeline.
Why some planners consider it a lower priority to leave behind
- Forced withdrawals accelerate the tax hit. The required emptying period on an inherited traditional IRA means the tax bill arrives on a schedule the heir doesn’t fully control.
- Ordinary income rates apply, not capital gains rates. Withdrawals are taxed as regular income, which is often a higher rate than the capital gains rates that apply to a taxable account’s growth.
- No basis reset exists for a traditional IRA. Unlike a taxable account, there’s no step-up mechanism to erase built-in tax liability inside a retirement account.
- Timing overlaps with an heir’s own income. An inherited IRA’s income lands on top of whatever the heir already earns that year, which can be worse timing than an heir choosing when to sell an inherited taxable investment.
Why “worse” doesn’t mean “worthless”
None of this means a traditional IRA is a poor asset to hold or to leave behind — the upfront tax deduction and years of tax-deferred growth are real benefits during the original owner’s lifetime. It simply means that, dollar for dollar, the after-tax value an heir actually keeps tends to be lower from a traditional IRA than from an equivalent taxable account or a Roth IRA, which is why the account’s role in a broader legacy plan is worth thinking through deliberately.
The bottom line
A traditional IRA still delivers meaningful tax advantages while it’s being funded and grown, but the tax bill that shifts to heirs at withdrawal is a real cost worth weighing against other assets that might pass along more efficiently.