Taking In-Kind Distributions from Your IRA

October 25, 2023 Beginner
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 73 in 2023 (the age rises to 75 in 2033), you need to start taking required minimum distributions (RMDs) from your traditional individual retirement account (IRA). But not everyone wants to liquidate stock shares and take out cash. The good news is that you don't have to.

By taking in-kind distributions from your IRA, you can pursue your financial goals without selling investments you'd rather keep.

An in-kind IRA distribution means transferring 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.

Reasons retirees take in-kind IRA distributions

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 determine if it's the right move for you. You might choose in-kind IRA distributions for several reasons, including:

  • The market is down: Some retirees don't like the idea of selling their investments when the market is low. An in-kind IRA distribution lets you keep your assets intact.
  • Fondness for a stock: If you like a stock and think it might perform even better in the future, you may not want to sell it just yet. An in-kind IRA distribution allows you to keep the stock.
  • You don't need the cash: Maybe you don't need the liquid money right now. Taking an in-kind distribution allows you to move assets to a taxable investment account and even potentially get favorable long-term capital gains treatment down the road.

No matter 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.

Tax treatment of in-kind IRA distributions

Even though you're not liquidating an investment, you'll still have to pay taxes when you use an in-kind IRA distribution. After deferring taxes on your IRA contributions for years, the IRS wants to collect that money, which is the point of RMDs in the first place.

Here are two tax rules to consider when taking 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 they're taxed on the current value of the assets they transfer. If you paid $20,000 for a stock a few years ago but the value of those shares is now $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 required by the IRS. You might need to move additional assets, or even withdraw some of your RMD in cash, to make up the difference.

  • An in-kind IRA distribution resets the basis: When you use an in-kind RMD, your basis resets. The IRS sees the value at the time of the transfer as your new basis.

Suppose you originally bought shares of a stock for $12,000. Now those shares are worth $17,000. By taking an in-kind RMD, you'll pay taxes on the higher amount, but that 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.

How to complete an in-kind IRA distribution

To take an in-kind distribution from your IRA, 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.

Generally, to calculate your RMD amount, check 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 ball-park value of your in-kind IRA distribution. Your IRA custodian should be able to help you with the transfer and most will even calculate your exact RMD amount for you. And if you already have a taxable brokerage account with your IRA Custodian, the process is usually very easy.

One important caveat: As you go through the steps to take an in-kind distribution, it's important to consider market fluctuations. 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 right away 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.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

You generally have to start taking required minimum distributions (RMDs) no later than April 1st of the year following the calendar year you reach age 73 or retire, whichever is later. If you were born on or before June 30, 1949, the required minimum distribution age is 70½. If you were born after June 30, 1949 and before January 1, 1951, the required minimum distribution age is 72. If you own 5% or more of the business sponsoring the Plan, other provisions may apply. Refer to your Plan document for details. However, you are not required to take a minimum distribution from your Roth accounts during your lifetime.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.