In-Kind RMD Distributions: Often Overlooked IRA Portfolio Strategy
While most clients understand that they will eventually be required to take annual—and taxable—distributions from their IRAs and other traditional retirement accounts (RMDs), they may have yet to develop an effective strategy for determining which investments to sell off during retirement. Once taxpayers reach their required beginning date—currently age 73—they must take a set amount from their IRA each year (their RMD). While IRS rules determine how to calculate the correct RMD amount, they don’t say anything about which investments the client must tap to satisfy their RMDs. The IRS only cares about receiving the correct amount. As a result, taxpayers have a considerable amount of discretion when determining how to satisfy their RMDs. In a down market, taxpayers may wish to consider in-kind distributions to avoid selling off equity investments at a depressed value.
RMDs: The Basics
All owners of traditional retirement accounts are required to take taxable lifetime RMDs once they turn 73 (the beginning date was historically age 70.5, and increased to 72 and then 73 under the SECURE Acts). Accounts subject to the RMD rules include IRAs, 401(k)s, SIMPLE IRAs, SEP IRAs—but not Roth IRAs or Roth 401(k)s.
Clients often ask about timing their RMDs to take them when their overall account value is at a low point, in an effort to reduce the overall RMD and associated tax bill. That strategy doesn’t work, because RMD amounts are based on the account value at the end of the previous year and the owner’s life expectancy. So, the client’s 2025 RMDs were fixed as of December 31, 2024.
401(k) RMDs are calculated separately, based on the specific account value. When calculating RMDs for IRAs, all of the owner’s traditional, SIMPLE and SEP IRAs are grouped together in arriving at the final RMD amount. The owner can then take the RMD from any IRA—and using any investment—that they prefer.
When to Consider In-Kind Distributions
The typical advice is for clients to take their RMDs by selling off investments that they’d like to offload regardless of the RMD obligation. Growth-oriented stock positions are often a good choice because by selling position that have appreciated substantially over time, the client reduces the risk that they’ll lose big in a market downturn—usually, when they can least afford to take a loss during their retirement years.
When the equity markets are down or the client’s stock holdings in general are down, that may not be a smart move. The client would essentially lock in their losses by liquidating the depressed equity holdings to satisfy their RMD obligations.
If that’s the case, the client may wish to consider an in-kind distribution. The in-kind distribution option doesn’t generate an immediate tax benefit—the client pays taxes on the entire RMD amount regardless of how they choose to take that RMD. The option simply allows the taxpayer to receive the securities themselves (and then transfer them into a taxable brokerage account) rather than selling at the reduced value for cash and locking in the loss. The goal is to maintain the position and wait for a market rebound.
The amount of the distribution is the fair market value of the assets on the date of transfer.
The client would then have to use assets outside of the retirement savings vehicle to satisfy their tax liability. While that’s always a smart idea, it does mean that the client must have sufficient non-retirement assets to cover the tax bill. It also means that the client must have sufficient non-IRA assets to cover their living expenses, since they won’t be receiving the IRA funds in cash.
While there won’t be an immediate tax benefit with the in-kind strategy, it’s possible that the client could benefit from a tax standpoint in the long run. If the securities regain their value—or even appreciate significantly after being transferred to the brokerage account—the client is taxed on that appreciation at the lower capital gains rate (while typical RMDs are taxed at ordinary income tax rates).
Conclusion
While pre-retirement planning can go a long way in reducing a client’s overall RMD obligations during retirement, once the client has reached their required beginning date, RMD obligations are fairly fixed. However, clients should be advised that they do have options that can add value in the long run—and the in-kind distribution option can be particularly valuable when faced with selling off depressed securities. Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.