How the ber-Wealthy Benefit from Investing Outside Retirement Plans (And How You Can Too)

Abstract

Part I of this article focuses on the stepped-up basis at death, describing the history and policies behind the adjustment of income tax basis to its fair market value on a decedent’s date of death. Part II of this article focuses on IRD. This section discusses the meaning of IRD as well as the historical basis for including these assets in the income of the recipient as well for exempting these assets from the basis step-up at death. Part III of this article analyzes traditional employer-sponsored retirement plans and deductible IRAs. This section spells out the distribution rules governing traditional retirement plans, and it explains the policy goals behind these plans.Part IV of this article analyzes the current way that we tax traditional retirement plan assets at death under the standard measures of a tax law’s desirability: administrative efficiency, equity, and neutrality. This section concludes that, while our current system may be administratively more efficient than alternate systems, it fails miserably in terms of equity. Part V of this article discusses some ways, apart from my proposal, in which the equity problem with the tax treatment of traditional retirement plans can be remedied. This section concludes that none of the remedies, whether real or proposed, is satisfactory. Part VI of this article analyzes my proposal. Although certain aspects of my proposal are necessarily complex, the core proposal is quite simple: capital assets held inside a deductible IRA or qualified retirement plan should qualify for the unlimited basis step-up in the same way that they would qualify if they were owned outside an IRA or retirement plan.