How Taking RMDs in Stock Can Work to Clients' Advantage

— Down market
— Lack of cash in the retirement account
— Affinity for a particular holding
— Not needing the cash

Down Market

In the event of a market downturn, or a depressed price for a specific holding, an in-kind distribution allows a client to avoid a loss in value on stocks, mutual funds, exchange-traded funds or other holdings.

This mitigates a situation in which a client sells shares inside the IRA and does the RMD as a cash distribution into a taxable investment account, only to find that the security has taken a sizable price jump in the interim before they could buy it back.

Lack of Cash in the Retirement Account

Dan O'Rourke, a CFP at Strathmore Capital Advisors, said there's typically "no gap" between selling and reinvesting.

"The shares simply move from the IRA to your taxable account," he said, "so you don't risk missing a rebound or having cash sit idle."

This can be an effective strategy for clients who lack liquid cash in their IRA and don't want to be forced to sell a stock or fund holding into a down market.

Affinity for a Particular Holding

"An in-kind RMD can be useful when an investor wants to satisfy the distribution requirement without selling a position they still want to own," said Said Theresa Pablos, a CFP with Equalis Financial. "The shares transfer from the IRA to a taxable account, and the value on the distribution date counts toward the RMD."

In this case, clients can maintain a position in the holding in a taxable account while being able to decide to keep or sell some or all positions based on their evolving situation or rebalancing needs.

Not Needing the Cash

Advisors find that many clients don't need the cash from their RMDs to fund their retirement. Rather, they take the RMDs because they are required to.

An in-kind RMD allows the client to move all or a portion of a position in a stock, fund or other holding to a taxable account intact. This maintains asset allocation and opens tax planning options.

"When a client is required to take distributions but doesn't need the money for living expenses or projects, we encourage them to reinvest the proceeds into their taxable account," said Dale Terwedo, CFP and founder of TFS Advisors. "Some will reinvest the entire amount and others will reinvest the net proceeds after accounting for the taxes that will be imposed. It is important to remember the tax impact; we have seen RMD range from just a few thousand dollars to well over $100,000."

A key consideration for any in-kind RMD is how taxes will be paid. Clients need to have liquid funds outside the retirement account to cover the taxes; tax liability doesn't go away with this type of distribution.

Timing Matters

The amount of the RMD will be the market value of the securities taken in-kind on the day of the distribution.

Since RMDs are based on the client's age and the year-end value of the retirement account as of the prior Dec. 31, the performance of the markets or individual holdings after that has no effect on the RMD amount for a given year.

With an RMD as a cash distribution from an IRA or other traditional retirement account, clients often have an amount that reflects their estimated tax liability for the distribution withheld. With an in-kind distribution, there is no cash tax withholding.

In this case, clients need to have sufficient cash outside their retirement account to cover the tax on the RMD. Otherwise, they might need to go back into the IRA and make a cash withdrawal to cover their taxes. This would result in additional taxes, not just on the in-kind distribution but also the amount to cover the taxes on a cash distribution.

Investment and Tax Planning

When clients don't need the cash from the RMD to cover their retirement living expenses, an in-kind RMD can help them maintain an allocation to the stock or other securities transferred in-kind. In the case of a down market, using an in-kind RMD distribution allows clients to keep their position in the transferred security but opens future tax planning options.

The market value of a fund or stock transferred in-kind becomes the cost basis of the securities on the date of the transfer. If the security is held for over a year in the taxable account and later sold at a gain, that gain will be taxed at long-term capital gains rates, which likely will be lower than the ordinary income tax rate assessed on RMDs.

Another potential tax advantage of an in-kind transfer relates to estate planning. Securities held in a taxable account can be passed on upon the client's death with a step-up in cost basis. This allows the heirs to sell some or all of the shares with little or no capital gains tax.