Retirement Income Blog

Once you’ve reached age 70½, you must take a minimum required IRA distribution (MRD) each year.  But if you don’t need the cash to live on and you expect your IRA stock to increase in the future, consider taking an ‘in kind’ IRA distribution for improved tax benefits.

Recent economic conditions have hit many equities hard. Their lowered values have lowered the value of the IRA they’re in. Since this year’s MRD is based on possibly a higher IRA value at the end of previous year, you will pay tax on an irritatingly large MRD for 2008.  To mitigate this, IRS has waived the 2009 MRD requirement altogether. 

Equities – such as stocks – you bought in your IRA have a ‘zero’ tax basis. Whatever value you take out for your IRA distributions is taxed at ordinary income tax rates. And that includes all gains those equities made. Also,  there’s no deduction for any loss within an IRA.

Keeping those depressed equities in your IRA for a possible comeback within a year or two will have you paying ordinary income tax rates when you take them out in the future for both their value and any gains. That’s a bad tax consequence of IRAs for appreciating equities.

Take an In Kind IRA distribution for reduced taxation

But if you expect those equities to appreciate, you have to withdraw your MRD, and you don’t need the cash for living, you can capitalize on that future growth at a much lower capital gains tax rate.  Do this by taking an ‘in kind’ IRA distribution.

You take an ‘in kind’ IRA distribution by requesting your IRA custodian to transfer the stock directly from your IRA account to a taxable account without cashing them in. Keep records on the value of that stock when it’s transferred. It’s on that value that you’ll have to pay ordinary income tax as an IRA distribution. You’ll have to come up with cash elsewhere to pay this tax.

But that stock value now becomes the basis of that transferred stock. If the stock appreciates three better tax consequences occur:

• Any gain will be subject to the low long term capital gains tax – and that’s for gain above its new basis. 
• You’ll not have to pay any tax on any gain until you wish to sell it.
• Dividends will be tax yearly – but if they’re qualified dividends, you pay at no more than the 15% rate (current rate in effect for 2009 and 2010)

Lastly, if the equities fall further and you decide their not worth holding for the future, you’ll be able to take a capital loss deduction and use it to offset other tax on other income or IRA distributions.

Bookmark It