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I'd appreciate a reality check on this: A while ago, I consolidated 401(K) plan from a previous employer and a qualified traditional IRA into a Rollover 401(K). I chose a TIAA-CREF Rollover which is an annuity vehicle. (Many of the expense-related criticisms of annuities don't apply to TIAA-CREF because they have extremely low expenses.) What I did not fully understand at the time is that if I die before I use this money, it will not transfer to my estate on a "stepped-up" basis, so my heirs will be responsible for taxes on any gains. I am considering rolling this over again, this time to a non-annuity Rollover IRA with Vanguard. What I don't fully understand is whether or not doing so would eliminate this problem -- in other words, do qualifed IRAs "step-up" or not? Are there any other pros and cons I should consider?

Thanks for your help. jtmitch
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Jtmitch posted;

"I am considering rolling this over again, this time to a non-annuity Rollover IRA with Vanguard. What I don't fully understand is whether or not doing so would eliminate this problem -- in other words, do qualifed IRAs "step-up" or not? Are there any other pros and cons I should consider?"

TMFPixy is more qualified to answer this hopefully he will see it and answer.

From my understanding, Traditional IRA's do not permit step-up NOR do they permit cap gains for the heirs. And if you are over 70 1/2 and have begun Minimum Required Distributions, your heirs will have to take distributions per your decision.

No matter how your IRA is distributed to your heirs, your heirs will have to pay income tax on the distribution since the 401K or RollOver IRA was funded with before tax dollars. There are ways they can delay distribution which will shelter the yearly gains and dividends from income taxation. If you rollover to a Roth IRA and pay taxes now, I believe your heirs can shelter the inheritance by leaving it in the Roth IRA.

I hope this is correct and that it helps.

BGP

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Oooopps.... What I meant to say was that`".... I consolidated 401(K) plan from a previous employer
and a qualified traditional IRA into a Rollover IRA...", not a Rollover 401(K).

jtmitch
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Greetings, Jmitch, and welcome. You asked:

<<I'd appreciate a reality check on this: A while ago, I consolidated 401(K) plan from a previous employer and a qualified traditional IRA into a Rollover 401(K). I chose a TIAA-CREF Rollover which is an annuity vehicle. (Many of the expense-related criticisms of annuities don't apply to TIAA-CREF because they have extremely low expenses.) What I did not fully understand at the time is that if I die before I use this money, it will not transfer to my estate on a "stepped-up" basis, so my heirs will be responsible for taxes on any gains. I am considering rolling this over again, this time to a non-annuity Rollover IRA with Vanguard. What I don't fully understand is whether or not doing so would eliminate this problem -- in other words, do qualifed IRAs "step-up" or not? Are there any other pros and cons I should consider?>>

Having an annuity inside an IRA is rather like wearing a raincoat indoors to me. Both vehicles allow earnings to compound on a tax deferred basis until withdrawal. Regardless, as BGPenhollo pointed out, neither vehicle allows heirs to receive a stepped-up basis on inherited assets. In your case it makes no difference whether your heirs inherit the annuity that's inside your IRA or something else you switch to within that IRA. If you die, your heirs will pay ordinary income taxes on all previously untaxed assets that are within that IRA at the time of your death.

Regards..Pixy
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