Required minimum distributions from traditional IRAs and other qualified retirement accounts do not have to be taken in cash.
Annual RMDs must be taken from most qualified retirement accounts beginning when the account holder reaches age 73. Beneficiaries who inherit IRAs and other retirement accounts also might be required to take RMDs.
Many people are surprised to learn that RMDs do not haeve to be made in cash.
An RMD (or any distribution) can be taken in cash or property. A distribution of property is known as an in-kind distribution.
IRA contributions (other than rollover contributions) must be made in cash.
For most IRAs, in-kind RMDs are simple. The IRA owner either already has or establishes a taxable account with the IRA custodian.
Then, the owner directs the custodian to distribute property from the IRA to the taxable account. For most IRA owners, the property distribution would be shares of a stock, exchange-traded fund or mutual fund.
The owner can specify that the transfer be of a certain number of shares or of shares equal to a certain value. There is no need to sell a stock or other investment to make an RMD.
The value of the property on the date of the distribution is the amount of the distribution.
That value also is the tax basis of the property in the taxable account, which is used to compute any gain or loss on a subsequent sale of the property.
There are several situations in which an IRA owner might prefer an in-kind distribution to a cash distribution.
When an investment’s value has declined, the owner might want to avoid selling at the lower value when he or she still likes the investment’s prospects.
Selling the investment and taking a cash RMD takes the risk of missing a recovery in the investment while the cash is transferred to the taxable account and before the owner can buy the investment in that account.
Indeed, a decline in an investment’s price is a good time to take a portion of that investment as an in-kind RMD.
The investment will be in the taxable account at the lower value. The price recovery will be taxed as a capital gain, which is taxed at a lower rate if the investment is held in the taxable account for more than one year.
If the investment remained in the IRA, the future recovery eventually would be taxed as ordinary income.
Some IRA owners prefer property distributions because they do not have idle cash in their IRAs. They are fully invested at their desired asset allocations.
An in-kind distribution ensures those owners maintain their asset allocations at all times. For them an in-kind distribution is very efficient.
Some IRA owners do not need cash. They have sources of retirement income and cash flow in addition to the IRA.
There is no reason for them to sell investments to satisfy the RMD mandate. An in-kind distribution makes more sense.
Trading costs no longer are an issue for most IRA owners, because most IRA custodians do not charge trading fees for stocks, ETFs and mutual funds.
But in some cases, trading costs such as brokerage commissions are a factor. The IRA custodian might allow an in-kind distribution at no cost or lower cost than a sale followed by a distribution.
Traditional IRA owners must remember that they owe taxes on the RMD whether it is taken in cash or property. Either cash from other sources must be available to pay the taxes, or part of the property that is distributed must be sold to pay the taxes.
