Stuck with an RMD? You don’t have to take it in cash. Here’s what you need to know about in-kind distributions from your IRA to your brokerage account.
Once you reach age 72, you need to start taking required minimum distributions (RMDs) from your traditional IRA (Read more about changes to RMDs due to the 2019 SECURE Act here). Not everyone wants to liquidate stock shares and take cash, though. The good news is that you don’t have to.
“You can do in-kind distributions from your IRA if you want to,” said Dara Luber, senior manager of retirement product at TD Ameritrade. “For some retirees, this can be a way to pursue their goals without selling investments they’d rather keep.”
An in-kind IRA distribution means moving stock from your tax-advantaged retirement account into a taxable investment account—such as a brokerage account—without liquidating the shares first.
Here’s what you need to know before you decide to take an in-kind distribution from your IRA.
Deciding to take an in-kind IRA distribution is about your personal preferences and goals. A retirement specialist or tax advisor can help you evaluate your situation to help decide if it’s the right move for you. According to Luber, retirees might choose in-kind IRA distributions for several reasons:
No matter what the reason, it’s important to evaluate your unique situation and figure out if an in-kind IRA distribution can help you pursue your retirement goals.
“You still have to pay taxes when you use an in-kind IRA distribution,” said Luber. “The IRS wants the money. That’s the point of RMDs in the first place.”
Here are some of the tax considerations involved with in-kind IRA distributions.
You pay taxes on the value of the assets you transfer. Some retirees prefer to use in-kind transfers during a stock market downturn because you’re taxed on the value of the assets you transfer, Luber explained. If you paid $20,000 for a stock a few years ago, but now the value of those shares is $15,000, you’ll pay taxes on the current, lower value of the distribution. But it’s important to pay attention to your total RMD amount. Although a lower value can mean lower taxes, it’s also possible that the value of your in-kind distribution may not meet the minimum. You might need to move additional assets, or even withdraw some of your RMD in cash, in order to make up the difference.
An in-kind IRA distribution resets the basis. “When you use an in-kind RMD, your basis resets,” said Luber. “The IRS sees the value at transfer as your new basis.” Suppose you originally bought shares of a stock for $12,000. Now those shares are worth $17,000. With the in-kind RMD, you’ll pay taxes on the higher amount, but it also becomes your new basis. If you sell the shares for $20,000 later on, you’ll only pay taxes on the $3,000 gained since your new basis. But keep in mind that the new basis also resets the time frame. The date of your transfer is considered the starting point for capital gains, so if you want the favorable long-term rate, you’ll need to keep the assets in your taxable account for more than a year before you liquidate them.
“Taking an in-kind distribution from your IRA is fairly straightforward,” said Luber. “Figure out how much you’re supposed to withdraw and then let your IRA custodian know you want to transfer the shares into your taxable account.”
Look in IRS Publication 590-B to find the factor for your age. Then divide your account balance (as it stood on December 31) by that factor. That’s the value of your in-kind IRA distribution. Your IRA custodian should be able to help you with the transfer. With TD Ameritrade, for example, it’s possible to go into your IRA online and move the shares into your TD Ameritrade brokerage account.
As you go through the steps, though, it’s important to take market fluctuations into account. It takes time to move assets, so if share prices drop during the transfer, you may not meet your RMD. Verify that the final value of the shares you transfer meets your RMD—and take steps to solve the problem if you fall short.
In the end, only you can decide whether it makes sense to take your RMD as an in-kind distribution. Carefully consider the implications and speak with a professional to help run the scenarios and figure out if it’s the right move for you.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
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