Does an estate IRA rollover get a basis step up?

No. An IRA rolled over from an estate (or inherited directly) does not receive a step-up in basis to its fair market value at the date of death.

While most inherited assets (like stocks, real estate, or brokerage accounts) receive a "step-up" in basis under IRC § 1014(a), IRAs are a specific exception to this rule because they are classified as Income in Respect of a Decedent (IRD).

1. Introduction

The concept of a "step-up in basis" generally allows heirs to sell inherited assets without owing capital gains tax on the appreciation that occurred during the decedent's life. However, this rule does not apply to assets that would have been taxable as ordinary income had the decedent received them while alive.

Who this applies to: Beneficiaries (including estates and surviving spouses) inheriting Traditional IRAs, SEP IRAs, and SIMPLE IRAs. Why it matters: Because there is no step-up, the beneficiary is liable for income tax on every dollar distributed from the IRA that represents pre-tax contributions and earnings, just as the original owner would have been.

2. Core Explanation

The General Rule: Income in Respect of a Decedent (IRD)

Under IRC § 1014(c), the step-up in basis rules explicitly do not apply to property that constitutes a right to receive "Income in Respect of a Decedent" (defined in IRC § 691).

• Definition: IRD refers to income the decedent was entitled to receive but that was not included in their taxable income before death.
• Application to IRAs: Since Traditional IRA contributions are typically tax-deductible and earnings are tax-deferred, the IRS views the account value as untaxed income. Therefore, the entire account remains taxable to the beneficiary when distributed.

Basis in an Inherited IRA

"Basis" in an IRA exists only if the decedent made nondeductible contributions (reported on Form 8606) that were not previously distributed.

• No Step-Up: The basis does not reset to the account's value at death.
• Carryover Basis: If the decedent had 50,000 of nondeductible contributions in their IRA, that 50,000 of "basis" carries over to the beneficiary. The beneficiary can withdraw that specific amount tax-free (pro-rated over distributions), but the rest of the account (the appreciation and deductible contributions) is fully taxable.

Scenario: Estate as Beneficiary vs. Spouse Rollover

The term "estate IRA rollover" often implies a scenario where the estate is the designated beneficiary, but the surviving spouse (as sole beneficiary/executor of the estate) "rolls over" the funds to their own IRA.

• Spousal Rollover: Even if a surviving spouse successfully rolls the funds into their own IRA, the assets do not get a step-up. The spouse simply assumes the tax status of the IRA. They pay tax on future distributions as if they were the original owner.
• Non-Spouse / Estate: If the estate distributes the IRA assets to heirs, the heirs receive the assets as IRD. They cannot roll this over into their own personal IRA (only into an Inherited IRA) and they owe income tax on distributions.

3. Summary

• Rule: IRC § 1014(c) denies a basis step-up for IRAs because they are Income in Respect of a Decedent (IRD).
• Tax Impact: Beneficiaries are taxed on distributions at their ordinary income tax rates, not capital gains rates.
• Exception: If the decedent had nondeductible contributions (basis), that specific dollar amount carries over to the beneficiary tax-free, but it is not "stepped up."
• Estate Transfers: Passing an IRA through an estate to a beneficiary does not change its character; it remains fully taxable IRD.

4. Suggested Next Steps

• Locate Form 8606: Check the decedent's last filed tax returns (going back several years if necessary) to see if they filed Form 8606. This is the only way to prove existing basis from nondeductible contributions.
• Calculate Deduction for Estate Tax: If the decedent's estate was large enough to pay federal estate tax, the beneficiary may be entitled to an income tax deduction for the estate tax paid on the IRA assets (IRC § 691(c) deduction).
• Review Beneficiary Designations: Confirm if the estate is truly the default beneficiary. If so, work with a tax professional to determine if a "spousal rollover" is still possible effectively via the estate (often allowed if the spouse has sole discretion over the estate assets).

Audit and Practitioner Considerations

1. Double Taxation Defense (IRC § 691(c)):

   • Trap: Practitioners often miss the IRC § 691(c) deduction. If the decedent's estate paid federal estate tax (Form 706), the beneficiary reporting the IRA income on their Form 1040 is entitled to a miscellaneous itemized deduction (or an offset) for the estate tax attributable to that IRA. Failure to claim this effectively results in double taxation.

2. Basis Documentation:

   • Challenge: The IRS may challenge a claim of non-taxable basis if Form 8606 was not filed by the decedent.
   • Action: If Form 8606 is missing but you can prove nondeductible contributions were made (e.g., via bank statements or transaction history), you may need to reconstruct the history to justify the tax-free portion of distributions.

3. "Looking Through" the Estate:

   • Risk: If an estate is the beneficiary, the IRA is generally subject to the "5-year rule" (entire balance must be distributed within 5 years) unless the estate can "look through" to a human beneficiary. This is a complex area; simply assigning the IRA to a beneficiary does not automatically grant them the "10-year rule" or "life expectancy" payout options unless specific Treasury Regulation requirements are met by September 30 of the year following death.