Spend $40,000 a Year From the IRA and Leave the $300,000 Brokerage Account Alone, and the Kids Inherit It With Every Gain Erased. Spend the Brokerage First to ‘Save the IRA’ and They Inherit a Ten-Year Tax Bill Instead

A retiree with a tax-deferred retirement account and a $300,000 taxable brokerage account who needs $40,000 a year has to choose which account to draw from first. The standard advice is to spend the taxable money first and let the IRA keep growing tax-deferred, but that advice will ultimately depend on the retiree’s tax bill. When the goal is leaving money to children, federal tax law treats the two accounts very differently at death, and the withdrawal order determines what kind of inheritance the kids end up with.

For context, $40,000 is a modest budget by almost every standard, even as federal labor data puts average annual spending for American households at $78,535 in 2024. A retiree drawing that amount from savings likely relies on Social Security for much of the rest, so the withdrawal order affects taxes for two generations.

How Inherited Brokerage Gains Disappear

Under 26 U.S.C. § 1014(a)(1), the basis of property inherited from a decedent becomes “the fair market value of the property at the date of the decedent’s death.” The IRS confirms in Publication 550 that when heirs sell inherited capital assets, the gain or loss is treated as long-term, regardless of how long you held the property.

In practice, a brokerage account bought decades ago, with most of its value in unrealized gains, passes to the children with a fresh cost basis. If they sell the week after inheriting, the appreciation that built up during the parent’s lifetime carries no capital gains tax. Leaving that account untouched while spending from the IRA lets the step-up apply to the largest possible pile of gains.

Why an Inherited IRA Comes With a Deadline

A traditional IRA gets no such reset. According to IRS Publication 590-B, owners who die after December 31, 2019, must make all distributions by the end of the 10th year after death, except for certain eligible designated beneficiaries, such as surviving spouses. The IRS gives the example that if the owner died in 2025, the beneficiary must empty the account by December 31, 2035, and most adult children don’t qualify.

Timing within that decade is also limited. Schwab notes that if the original owner died after reaching RMD age, the beneficiary must take annual withdrawals during the ten years as well. Every dollar counts as ordinary income, often on top of the heir’s own salary during peak earning years.

A $300,000 Swing in the Heirs’ Tax Bill

At $40,000 a year, a $300,000 brokerage account lasts 7.5 years. Spending it first leaves an IRA that is roughly that much larger than it would otherwise be, before any growth, and leaves no step-up to pass along. Spread evenly over ten years, the extra balance adds $30,000 of taxable income to the heir each year.

For a married heir already in the 22% federal bracket, which ran from $96,951 to $206,700 of taxable income for joint filers in 2025, that works out to $6,600 a year and $66,000 over the decade. The example leaves out investment growth, which would make both the IRA bill and the missed step-up larger.

Where Spending the Brokerage First Still Wins

The IRA-first approach has a cost, because withdrawals are taxable to the retiree right away. The comparison comes down to who has the lower tax rate. Married couples pay 12% on ordinary income up to $96,950 of taxable income in 2025. A retiree drawing $40,000 a year may therefore pay a lower rate than a working child would pay on the same dollars later.

The math reverses in some cases. If the brokerage account holds little unrealized gain, the step-up wipes out little. If the retiree expects to spend most of the money, the inheritance question matters less. Heirs in low brackets can also inherit an IRA cheaply. The IRS also excludes from the step-up appreciated property that an heir gave the deceased person within 1 year of death, under § 1014(e).

What Retirees With Both Accounts Can Check

Three numbers decide which order works better. The first is the brokerage account’s cost basis: the bigger the unrealized gain, the more the step-up is worth. The second is the gap between the retiree’s marginal bracket and the bracket each child is likely to be in when the inherited IRA has to be emptied. The third is how much room is left in the retiree’s 12% bracket each year, since IRA withdrawals that fill that band are taxed at a rate most working heirs will not get.

A household that draws from the IRA up to the top of a low bracket and leaves appreciated brokerage shares alone uses both the step-up and the parent’s lower rate. Spending the brokerage first gives up the basis reset and leaves the children a ten-year deadline on a larger pre-tax balance.

The account-ordering rule meant to protect the retiree can end up shifting a larger tax bill to the heirs (we counted nine IRS rules that quietly drain retirement accounts like this and laid them all out in a free report).

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