Do Inherited IRAs Get a Step-Up in Basis? Traditional and Roth Rules

No, an inherited IRA does not get a step-up in basis. Federal tax law specifically excludes retirement accounts from the step-up rule because the money inside them is deferred income the original owner never paid tax on, not appreciated capital. When you withdraw from an inherited traditional IRA, every dollar is taxed at your ordinary income rate, which reaches 37% in 2026 for single filers with income above $640,600.¹ The rules differ for Roth accounts and for after-tax contributions the original owner made, so the practical answer depends on what kind of IRA you inherited and what’s inside it.

Why the Step-Up Rule Doesn’t Reach IRAs

The step-up in basis resets an inherited asset’s cost basis to its fair market value on the date the owner died. If someone bought stock for $10,000 and it was worth $100,000 when they died, the beneficiary inherits it with a $100,000 basis. Sell it the next day for $100,000 and you owe zero capital gains tax. That $90,000 of appreciation is never taxed.²

IRAs are carved out by a single sentence in the code. Section 1014(c) says the step-up does not apply to property that constitutes “a right to receive an item of income in respect of a decedent” under Section 691.² An inherited IRA is exactly that. The money went in pre-tax, grew tax-deferred, and the tax bill was always waiting. Death doesn’t erase it. It shifts the bill to whoever inherits the account.

This concept is called “income in respect of a decedent,” or IRD. Section 691 requires whoever receives that income to include it in their own gross income for the year they receive it.³ The character of the income carries over from the decedent, so it stays ordinary income in your hands.

How Distributions From an Inherited Traditional IRA Are Taxed

Any amount distributed from a traditional IRA is included in the recipient’s gross income.⁴ For most inherited traditional IRAs, that means the entire balance is taxable when withdrawn. The original owner contributed pre-tax dollars and deducted them, so the account’s basis was zero. You pay ordinary income tax on every distribution.

How much that costs depends on your other income. In 2026, the federal brackets for single filers run from 10% on the first $12,400 of taxable income up to 37% on income above $640,600. Married couples filing jointly hit the 37% bracket at $768,700.¹ A large inherited IRA distribution can push you into a higher bracket for the year you take it, which is why spreading withdrawals across multiple years often produces a lower total tax bill than a single lump sum.

The After-Tax Contribution Exception

Some IRA owners made contributions they could not deduct, usually because their income exceeded the deduction threshold or they were covered by a workplace retirement plan. Those after-tax contributions represent the decedent’s basis in the account, and that portion passes to you tax-free. Only the earnings on those contributions are taxable.

Tracking this basis is your responsibility as the beneficiary. You report it on Form 8606 with your tax return for any year you receive a distribution from an inherited traditional IRA that contains after-tax money.⁵ The form calculates the ratio of after-tax contributions to the total account balance, and that ratio sets how much of each distribution is tax-free. Skip the form and you risk paying tax on money that should have been excluded. The decedent should have been filing Form 8606 during their lifetime, and their records are your starting point.

Inherited Roth IRAs

Inherited Roth IRAs also get no step-up in basis, but the practical impact is much lighter because Roth distributions are generally tax-free. The original owner already paid income tax on their contributions, so withdrawals of contributed amounts are always tax-free to you.

Earnings are tax-free too, as long as the distribution qualifies. The key requirement: the original owner’s Roth IRA must have been open for at least five tax years, measured from January 1 of the year the owner made their first Roth contribution.⁶ The clock runs from the decedent’s first contribution, not from the date you inherit. If your parent opened a Roth in 2018 and died in 2026, the five-year requirement was met in 2023, and all distributions to you are tax-free.

If the Roth was less than five years old at the owner’s death, withdrawals of contributions remain tax-free, but earnings are taxable. Most inherited Roth IRAs clear the five-year threshold easily because the owner typically had the account for years before passing away.

The IRD Deduction for Large Estates

When an inherited IRA is large enough that the decedent’s estate actually owed federal estate tax, you get a partial offset. Section 691(c) allows a deduction on your income tax return for the portion of estate tax attributable to the IRA.³ Without it, the same money would be taxed twice: once as part of the estate and again as income to the beneficiary.

The deduction is a miscellaneous itemized deduction that is not subject to the usual floors or phase-outs. The calculation compares the estate tax actually paid to the estate tax that would have been owed if the IRD items were excluded. The difference is the deductible amount, spread proportionally among all beneficiaries who receive IRD.

This only matters for very large estates. The federal estate tax exemption for 2026 is $15 million per individual, or $30 million for a married couple, so estates below that threshold owe no estate tax and generate no IRD deduction. For estates that do cross the line, the deduction can be substantial and is easy to overlook.

State Income Tax Adds to the Bill

Federal tax is only part of the picture. Most states tax inherited IRA distributions as ordinary income at their standard rates, which range from around 2% to over 13% depending on the state. Roughly a dozen states impose no income tax at all, and some that do offer partial exemptions for retirement income, often limited to taxpayers above a certain age. The combined federal and state rate can push the effective tax on an inherited IRA distribution well above 40% for high-income beneficiaries in high-tax states.

Timing Matters More Than Basis Ever Would

Because there’s no step-up to reduce the tax on an inherited IRA, when you take distributions is the main lever you have. Most non-spouse beneficiaries who inherited after 2019 must empty the account by the end of the tenth calendar year following the owner’s death.⁷ Within that window, you generally choose how much to take each year, and that choice controls your tax bill.

If the original owner died on or after their required beginning date (currently age 73 for those born between 1951 and 1959), you must also take annual required minimum distributions in years one through nine, with the remaining balance distributed in year ten.⁶ If the owner died before their required beginning date, no annual minimums are required during the 10-year window; you could wait until year ten and take everything at once, though doing so concentrates all the tax into a single year.

Spreading distributions across the full 10-year period, or front-loading them in years when your other income dips, keeps more of the account out of the top brackets. That kind of planning is where beneficiaries of inherited IRAs actually save money, since the step-up door is closed.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
3
Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents
4
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
5
Internal Revenue Service. Instructions for Form 8606
6
Internal Revenue Service. Publication 590-B – Distributions From Individual Retirement Arrangements
7
Internal Revenue Service. Retirement Topics – Beneficiary