If you sell investments from your brokerage account, you pay tax on the gains. Die still holding them, and your heirs pay nothing.
That one sentence captures a quirk in the tax code that quietly shapes how much of your life savings reaches the people you leave it to. It has a name, the step-up in basis, and most people never plan around it. Once you understand it, it changes the order you should spend your accounts in, and in some cases whether you should be converting money to a Roth at all.
A quick example
Say you bought 1,000 shares at $10 each, a $10,000 investment. Years later they are worth $100 each, so $100,000 in all. That is a $90,000 gain.
If you sell the shares yourself, you owe long-term capital gains tax on that $90,000, roughly $13,500 at the typical 15% rate.
Now suppose you never sell, and you pass the shares to your children instead. At your death, their cost basis "steps up" to the current value, $100 a share. They can sell the next day and owe nothing. Same shares, same $90,000 gain. The person who earned it would have paid tax. The person who inherited it does not.
It depends entirely on which account the money sits in
Here is the part that surprises people: the step-up only applies to one of your three account types. What happens to your money at death is completely different depending on where it lives.
Brokerage (taxable): the built-in gains are wiped out for your heirs, exactly as in the example above. This is the account the step-up rewards.
Traditional IRA or 401(k) (tax-deferred): the opposite. Your heirs owe ordinary income tax on every dollar they withdraw. And under the SECURE Act, most non-spouse heirs must drain the account within 10 years, often landing in their own highest-earning years. They can easily pay more tax on it than you would have.
Roth (tax-free): nothing changes on the tax side. It passes tax-free and keeps growing tax-free.
So the code quietly rewards one specific move, and most people do the opposite. The appreciated brokerage assets are the ones to hold. The big traditional IRA is the one you do not want to leave behind.
Why the step-up exists
If it seems strange that the tax code would forgive a lifetime of gains, the history explains it. Originally the step-up was meant to avoid double taxation. Large estates paid estate tax, so taxing the heirs on the capital gains as well looked like taxing the same money twice. And decades ago, heirs often could not even find the original purchase price of investments their parents had held for 40 years.
Both reasons have faded. Today the federal estate-tax exemption is so high, $30 million for a married couple in 2026, that almost no one pays it. And cost-basis records are all digital now. The original justifications mostly do not apply anymore. The benefit stayed.
The part worth noticing
Step back and the pattern is striking. The tax code forgives a lifetime of investment gains at death, but collects in full on the retirement account you built from your paycheck. The gain on your stock disappears from your heirs' tax bill. The savings from your 401(k) do not.
What it means for your plan
This is why withdrawal order matters so much.
The traditional IRA is the account your heirs are taxed hardest on. So while you are alive, that is the one to draw down and spend. Let the appreciated brokerage account and the Roth pass through untouched, because those are the accounts that reach your heirs most efficiently.
And if you do not expect to spend it all, a Roth conversion can be worth doing purely for your children. Instead of leaving a traditional IRA they would be forced to drain at their own peak tax rate, you convert it now, at your rate, and they inherit a tax-free Roth. Since the children are the ones who benefit, it can even make sense for them to help fund the conversion tax.
The bottom line
The step-up in basis is one of the biggest quirks in the tax code, and one of the few that rewards you simply for knowing it is there. The ultra-wealthy have built entire strategies around it, living on borrowed money and letting the step-up erase the gains at death. You do not need billions to use the same principle. Which accounts you spend down, and which you leave untouched, is the version of it the rest of us can actually put to work.
Educational only, not financial or tax advice. Everyone's situation is different. Model your own numbers, or check with a fiduciary advisor or CPA, before acting.