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.