Use In-Kind RMDs to Avoid Selling Your Retirement Account Assets
The stock market isn’t doing so great these days. While a number of factors have played a role in this year’s bear market (2022), skyrocketing inflation — the highest in over 40 years — and aggressively rising interest rates, have combined to drive share prices down in most sectors. It’s down nearly 20 percent year to date.
And, Bonds haven’t done so well either… And the IRS doesn’t seem to care.
If you’re 73 or older, you still have to take your annual RMD (Required Minimum Distribution) from your traditional IRA, SEP-IRA, or SIMPLE IRA by the end of the year. (RMDs are not required for Roth IRAs so long as the account holder is living.)
If you turn 72 this year, you can wait until April 1 of next year (2023) to take your ﬁrst RMD—but you’ll also have to take your second RMD by the end of that year.
Your RMD is a percentage of the total value of your retirement accounts based on your age and life expectancy. The older you are, the more you must distribute.
But here’s the kicker: Your RMD must be based on the value of your retirement account as of the end of the prior year—December 31, 2021, in the case of 2022 RMDs. So you may have a high RMD due this year even though the value of your retirement portfolio has declined, perhaps substantially.
If you have enough cash in your account(s) to fulﬁll your RMD, there’s no problem.
But what if your retirement account consists mainly of stocks, bonds, mutual funds, or ETFs? You can always sell enough of these assets so that your retirement account can pay out your RMD. You can then use part of that RMD payout to pay the income tax due on your distribution.
But if you don’t want to sell these investments at their current low level, there’s another option: do an in-kind distribution.
In-Kind IRA Distributions
There is no law that says you have to sell the stocks or other securities in your IRA at their current depressed prices and then distribute the cash to yourself to fulﬁll your RMD. Instead, you can simply transfer stock, bonds, mutual funds, or other securities directly from your IRA to a taxable account, such as a brokerage account. No selling is involved.
The amount of your in-kind distribution is the fair market value of the stock or other securities at the time of the transfer. For example, if you paid $25,000 for stock three years ago, but it is worth $20,000 today, your distribution is $20,000.
When you do an in-kind RMD, you still have to pay income tax on the distribution at ordinary income rates. To avoid selling any part of the stock or other securities you’ve transferred, you’ll have to come up with the cash to pay the tax from some other source, such as a regular bank account.
Of course, you could sell your stock or other securities from your IRA to satisfy your RMD, and then use the cash to rebuy the same securities for your brokerage account. But with today’s wild market swings, there is always the danger that the value of the stock or other securities could shoot up, requiring you to rebuy at a higher price. An in-kind RMD helps you avoid this danger.
Tax Savings When Stock Is Sold
With an in-kind distribution, not only do you avoid selling stocks in a down market, but the transfer may also reduce the taxes due on future appreciation when you eventually do sell. This is because when you do an in-kind RMD, it resets the basis to the fair market value at the time of the transfer. If you later sell the stock or other securities, you pay tax only on the amount gained over your new basis.
Moreover, when you later sell the stocks or other assets out of your brokerage account, they will generally be taxed at capital gains rates instead of ordinary income tax rates. If you hold the stocks for over a year, they will be taxed at the long-term capital gains rates of 15 percent or 20 percent. The stock sold from an IRA or another retirement account is always taxed at ordinary income rates, which are as high as 37 percent.
Example: Jack is 74 years old and in the 32 percent income tax bracket. His RMD for 2022 is $50,000. He transfers to his brokerage account mutual fund shares that he purchased 10 years ago for $25,000, which are now valued at $50,000 (but were valued at $60,000 one year ago).
He owes $16,000 in income tax on the distribution, which he pays from separate funds. The basis of the mutual fund shares is reset to $50,000.
If he sells the shares out of his brokerage account for $60,000 one or more years later, his taxable proﬁt will be $10,000 and he’ll pay a 15 percent long-term capital gains tax on the amount—a $1,500 tax.
In-Kind RMDs Step-by-Step
Here’s how to execute an in-kind RMD:
- Determine the account balance of your IRA or another retirement account as of December 31 of the prior year.
- You can use the IRS worksheet or one of many online calculators to determine the amount of your RMD based on your age in the current year.
- Notify your IRA custodian of the particular shares (or other assets) you want to transfer to your brokerage account—these must be equal to or greater than your RMD.
- Monitor stock prices before your transfer is completed—if the price goes down, you may need to transfer more stock or other assets (or you may need to transfer less if the price goes up).
- You (and the IRS) will get a 1099-R from your IRA custodian, showing the distribution and the value
of the stock or other securities on the day of the transfer. You’ll owe income tax on the full amount.
Owners of traditional IRAs, SEP-IRAs, or SIMPLE IRAs who are 73 or older must take the required minimum distributions by the end of the year. (Those who turn 72 this year can wait until April 1 of the following year to take their ﬁrst RMD.)
The RMD amount is based on the value of your retirement account as of December 31 of the prior year. So you may have a high RMD due this year even though the value of your retirement portfolio has declined.
Instead of selling stock or other securities in a retirement account and distributing the cash to yourself, you can do an in-kind RMD by transferring stock, bonds, mutual funds, or other securities directly from your IRA to a taxable account, such as a brokerage account. The amount of the RMD is the fair market value of the stock or other securities at the time of the transfer.
You must pay tax at ordinary income rates on the value of your RMD. To avoid selling stock or other securities, you’ll need to come up with the cash for this.
The basis of the stock or other assets transferred is reset to their fair market value on the date of the transfer. If the stock or other securities are later sold, you pay tax only on the amount gained over the reset basis—and this tax is paid at capital gains rates.
If you are 73 or older, you must take the required minimum distributions by the end of the year. (Those who turn 72 this year can wait until April 1 of the following year to take their ﬁrst RMD.)
If your retirement accounts consist primarily of stocks, bonds, or other securities, you don’t have to sell them at their current depressed levels and distribute the cash to yourself to fulfill your RMD. There’s another option: Do an in-kind distribution.
With an in-kind RMD, you transfer stock, bonds, mutual funds, or other securities directly from your IRA to a taxable account. No selling is involved. The amount of your RMD is the fair market value of the stock or other securities at the time of the transfer.
With an in-kind distribution, not only do you avoid selling stocks in a down market, but the transfer may also reduce the taxes due on any future appreciation when you eventually do sell. This is a good thing.
If you have questions, need clarity, or need help understanding how to maximize your Retirement Assets and/or Tax Strategies to further help retain or maximize your financial gains, please contact us at Morris + D’Angelo. This is our Expertise! Yes, we have Crypto Experts available for you.
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Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo
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