Take an ‘in kind’ IRA Distribution If You Expect Its Value to Increase
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.
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Tags: ira distribution
March 26th, 2009 at 10:53 am
Why not just keep it simple and sell the stock in the IRA account and buy it in a regular taxable account? Except for the transaction costs, it’s the same result whether the stock appreciates or loses value. (The only thing that’s unclear is the effective ‘purchase date’ of the in-kind stock distribution - if it is the original purchase date within the IRA, then there could be some advantage to the in-kind distribution if you think you’ll want to sell the stock within a year at a profit.
April 3rd, 2009 at 5:42 am
Nice tip. I like the fact your not selling the stock just moving it. This way you do not lock in the loss and can make money. Wonder if that can be done in 401 k or if you have to convert to ira then do it.
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May 5th, 2009 at 12:38 pm
That is a great idea. You can also do the same when transfering iras and other retirement accounts from one broker to another. Like the fact your not cashing the stock out so your not looseing any money.
August 15th, 2009 at 8:20 am
IRA Distribution Rules at Death
The distribution rules required at the death of an IRA owner depend on several things:
1. Did the IRA owner die before or after the “required beginning date”?
2. Who is the beneficiary?
In order to carry out the wishes of the IRA owner, evaluating both practical and estate planning implications of various decisions during the IRA owner’s life is essential. Important choices occur when the IRA owner makes his beneficiary election and, if married, by the spouse after the death of the IRA owner
September 30th, 2009 at 10:51 am
Thanks for the post. Learn something there. I think equities are going to continue to rise, it seems the worst of the financial crisis could be over. The dow looks like it may be heading back upto 10,000. It’s standing at 9,600 right now. Hopefully this will benefit us all if we are close to retirement or not.
November 16th, 2009 at 5:28 pm
Good tip. On the other hand, there could be an advantage to converting an IRA to a Roth, paying tax on the lower value, and neither the owner, the owner’s spouse or other beneficiaries will pay tax on distributions. Moreover, the MRD rules are out the window on the owner and spouse if married, but not other beneficiaries. So far, projections indicate that a Roth conversion is risky because for example a single owner might die soon after the conversion is irrevocable and the heirs might not be too happy. But the owner might be able to cover the risk at reasonable cost through term life insurance if young and healthy enough. Also, projections indicate that a Roth conversion makes more sense for high net worth individuals. Also, consider the asset protection lost when pulling money out of an IRA if the owner lives in a state where it’s exempt from creditors.
December 10th, 2009 at 12:56 pm
That is a great idea. You can also do the same when transfering iras and other retirement accounts from one broker to another I think equities are going to continue to rise, it seems the worst of the financial crisis could be over.
February 7th, 2010 at 10:52 am
I am surprised that you are recommending investment in an asset whose value is dependent on equities for people above the age of 70. With all due respect, a drop in value of equity will cause lot of problems for these guys.
February 10th, 2010 at 6:21 am
Thanks for this post, and actually for the blog at all. That’s the first blog, dedicated to the sphere of retirement, and its very helpful. I can note some things for my retirement.
February 26th, 2010 at 4:09 am
That is a great idea. Hopefully this will benefit us all if we are close to retirement or not.
March 2nd, 2010 at 3:55 am
Important choices occur when the IRA owner makes his beneficiary election and, if married, by the spouse after the death of the IRA owner
March 6th, 2010 at 5:13 am
Yea, right. Do you actually think that people would like to gamble when it comes to their retirement ?
March 6th, 2010 at 5:11 pm
Very clever and informative post, although I agree with CNA Training it terms of the length of the investment, those over 70 investing in 70 may well not have time on their side to ride out the fluctuations in price. Retirement planning is always a juggle, although this does provide an alternative option to cashing in
March 17th, 2010 at 7:31 am
Having just ready a few of your articles I’m now quite worried as at the age of 41 I have made no plans for my retirement and I’m thinking that maybe I should……..or should have! I feel like I’ve just tapped into a new world here, good info & useful. thanks
March 21st, 2010 at 9:05 pm
I agree with Ridge converting an IRA to a Roth, paying tax on the lower value, and neither the owner, the owner’s spouse or other beneficiaries will pay tax on distributions.
March 25th, 2010 at 2:31 pm
I’m intrigued that in the U.S there is tax on capital gains, however I am impressed at the methods used above to lower the rate paid. I am lucky that in New Zealand we do not pay such a tax - however I am guessing company taxes are much higher here!
March 29th, 2010 at 8:33 pm
Thats a great strategy Bob, especially since the S&P 500 which was around 900 at the time of your post has now increased to almost 1200.
April 3rd, 2010 at 10:33 am
A few of the posters here have some great additional info. I guess that is the whole point of the commenting board. I just wish the IRA deduction was raised from $5,000. If you have a SEP you can drop a ton of money but you are seriously limited with an IRA…
April 13th, 2010 at 2:40 pm
My IRA is just about nothing at the moment. My financial adviser told me to check out “Cool Springs Life Equity Strategy” for good long term protection.
April 29th, 2010 at 2:01 am
That is a great idea. You can also do the same when transfering iras and other retirement accounts from one broker to another.
May 24th, 2010 at 5:19 am
Your financial advisor knows his stuff, this is a good idea.
“My IRA is just about nothing at the moment. My financial adviser told me to check out “Cool Springs Life Equity Strategy” for good long term protection.”
May 29th, 2010 at 6:37 am
It’s always a good advice to invest your hard-earned retirement money. It’s hard to simply invest without thorough research.
June 14th, 2010 at 3:48 pm
Tax on the MRD is almost like getting taxed twice; you pay tax on your income and get exemptions on your IRA, but then again when you draw on your retirement funds. But you can mitigate it by transferring stock to an account which is only subject to \regular\ income tax. Do I have this right? It’s a little complex. Anyway good advice here and also in the comments, thanks folks!
June 17th, 2010 at 5:36 pm
That’s a good idea. I’ve been thinking for a while about ‘in kind’ IRA distribution for the improved tax benefits and such. Good info, I’m going to do some more research on it.
July 2nd, 2010 at 4:08 am
Thanks for the information on IRA’s. Much appreciated.
July 7th, 2010 at 7:31 pm
I had wondered about this tactic. I didn’t know you could do this. I have an IRA rollover that had been desimated this last BIG drop and wiished I could transfer the value or the stocks into a Roth IRA since I had already lost most of its value. However, I did not want to cash it in but would prefer to see if it could ride high again sometime in the future. This is NOT the same thing as taking a distribution at retirement so I don’t know if the IRS would allow the transaction. I wondered if I could do an In-Kind distribution to place into the ROTH though and pay the tax on the value at the time of distribution without cashing the stocks to take out. This would avoid the fees of selling.
Any ideas would be appreciated.
July 10th, 2010 at 11:31 pm
Financial institutions should offer reverse mortgage to seniors as it is a great way to ensure regular pensions for them after retirement. This offers added security for those who have few other income sources.
July 21st, 2010 at 11:23 am
I had quite a lot of losses on the stock markets so I did manage to offset my tax with those losses, so your advice has worked for me in practical terms.
July 21st, 2010 at 4:10 pm
I had not heard of an in kind IRA distribution before reading your article. Thanks for the info it sounds like a better solution than converting an IRA to a Roth and then paying tax on the lower value, and neither the owner, the owner’s spouse or other beneficiaries will pay tax on distributions.
July 25th, 2010 at 1:10 pm
Your tips on taking an inkind IRA distribution are great. I wish I had read them prior to my parents liquidating their IRA’s, for which they had to pay ordinary income tax. They could have strategized to minimize their tax liability had they known. Thanks for sharing.
August 3rd, 2010 at 4:38 am
great idea, but strange they are recommending investment in an asset whose value is dependent on equities for people above the age of 70
August 8th, 2010 at 6:54 pm
This is very interesting. Other countries all include this option for their IRA distribution. Good to see people can make a range of choices when retired.