Retirees, Shift Stock to Satisfy Your RMD

Use this smart tactic to keep your shares as well as make Uncle Sam happy.

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Having trouble parting with stock that you need to cash out to satisfy your annual IRA required minimum distribution? There’s no need to break up. You can keep your shares and make Uncle Sam happy at the same time with an “in kind” transfer.

The rules don’t require that you pull cash out of your IRA, only that a certain amount comes out of the tax shelter each year starting at age 70½ so the IRS can tax it. It’s perfectly okay to have stock or mutual fund shares transferred from your IRA to a taxable account to satisfy your RMD.

Such transfers attracted a lot of interest during the financial crisis of 2007–09 as markets collapsed, making many retirees loath to sell investments at bargain-basement prices. Transferring depressed shares allowed investors to hold on in hopes of a stock market rebound, which, indeed, occurred surprisingly quickly.

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Retirees mulling the move these days are more likely not to need their RMD for spending money and believe their stock still has room to grow. “Some customers own a security and really love that stock,” says Maura Cassidy, vice president of retirement for Fidelity Investments, “and selling it isn’t something they would do if not for the RMD.”

You could, of course, sell the stock and use the payout from your IRA to repurchase the shares in a taxable account. But the transfer has a couple of advantages. First, you are certain to keep the money invested. Second, “you’re saving a little bit in transaction costs,” says Dave Bensema, a regional leader of planning for Illinois at BMO Wealth Management, in Chicago.

Here’s how it works: Figure how much you must withdraw from your IRA for the year by dividing your account balance as of December 31 of the previous year by the IRS factor for your age, which is found in IRS Publication 590-B. Then, direct your IRA custodian to transfer stock or mutual fund shares whose total value equals the RMD from the IRA and into a taxable account.

You (and the IRS) will get a 1099-R from the custodian showing a distribution of the amount the shares were valued at on the day of the transfer. You’ll owe tax on the full amount, assuming you had not made non-deductible contributions to the IRA.

One potential pitfall: The market can fluctuate between the time you request the in-kind transfer and when it occurs. Transfers are valued using the market close price on the day of transfer, so it’s critical to check back with your custodian after the move is made to learn its actual value. “If you thought it would be a certain value but it turned out to be lower, you might not satisfy the RMD,” says Ken Moraif, a certified financial planner in Plano, Tex. If the transfer fell short of your required minimum distribution, you’ll need to move more shares or withdraw cash. If you don’t make up the difference, you are subject to a penalty worth 50% of the shortfall.

Because transferring stocks can take more time than just tapping cash from the IRA, don’t wait until December 31 to make the transfer request. The earlier in December, the better.

Don’t Pay the Tax Twice

It’s important to remember that once the shares move to the taxable account, their tax basis changes to their value at the time of transfer. If you paid $10,000 for the shares inside your IRA but they were worth $15,000 at the time of the transfer, you’ll be taxed on the $15,000.

But that’s also your new basis and only gain from that level on will be taxable when you sell. Forget that and you could pay tax on that $5,000 of appreciation twice, once when you took the RMD and again when you sell the shares.

Just as your basis resets with the transfer, as far as the IRS is concerned, so does the time frame for how long you have owned the stock. Your holding period begins anew with the transfer, so you must hold the stock for more than a year for a profit to qualify as a tax-favored long-term capital gain if you sell the stock from the taxable account.

Rachel L. Sheedy
Editor, Kiplinger's Retirement Report