in-kind (stock) IRA distribution pro & con for different scenarios
Is my thinking correct regarding in-kind RMD from Taxable IRAs?
This question concerns in-kind (stock) IRA distributions. The RMD tax is the same if it is taken as cash or in stock (in-kind), so the RMD tax is the same for all scenarios & does not become a part of these calculations.
Scenario 1:If the plan is to take the RMD in stock and sell the stock at a later date, it seems best to take stock for RMD that has already APPRECIATED.
Scenario 1: First pay RMD tax on 30,000 RMD distribution from other IRA cash.
Take 30,000 RMD in stock that was bought in IRA for 20,000 and has appreciated to 30,000. Basis for RMD stock calculated at the RMD date is 30,000. Sell that same stock several years later in the taxable account when it reaches 40,000. Since Basis for RMD stock calculated at the RMD is 30,000. You pay capital gains tax on 10,000.
Note: Compared to buying the same stock in taxable account for 20,000: This stock will appreciate to 40,000 the same BUT the Basis for the stock purchased in the taxable account is 20,000 resulting in capital gains tax on 20,000.
Scenario 2: If the plan is to hold “RMD in-kind stock” in the taxable account “forever”, it seems best to take RMD stock that has DEPRECIATED in the IRA. This seems to result in a lower tax bill for the potential in stock appreciation.
Scenario 2: First pay RMD tax on 30,000 RMD distribution from other IRA cash.
Take 30,000 RMD in DEPRECIATED stock that was bought for 60,000 in the IRA. The tax paid is the same as for Scenario 1 but the tax paid is low compared to the potential for this equity. The stock’s basis is 30,000 for 60,000 worth of stock purchased, so that decreased basis is not good if the plan is to sell the stock, but if the stock is held “forever” and not sold, taking the RMD in depreciated stock seems to result in a a good tax savings. You are paying tax on 30,000 dollars worth of stock that is only temporarily depressed in value. It is almost like getting a deduction for a 30,000 loss and also getting to keep the stock for future appreciation. The lower basis of 30,000 is not good if the plan is to sell the equity in the taxable account.
Permalink Submitted by William Tuttle on Sun, 2019-08-04 01:34
Permalink Submitted by Janet Toot on Tue, 2019-08-06 22:52
Thank you for your reply.You asked: “How do (I) propose to know which stock is appreciated and which is depreciated?”My answer: We have many stocks in our IRA. At times, some of those IRA stocks have appreciated from the purchase price and some have depreciated from the purchase price. I am puzzled that you consider taking an advantageous in-kind distribution might be timing the market or speculation and gambling. Perhaps I did not make myself clear: Joe Cicchinelli has stated that taking and RMD in stocks that have gone down in value can be advantageous. https://irahelp.com/slottreport/taking-non-cash-required-distributions-your-ira
Permalink Submitted by David Mertz on Wed, 2019-08-07 12:53
The only thing that doing an in-kind distribution of an RMD does is avoid the individual having to repurchase the security outside the IRA in the case where the individual wants to continue to hold the security, avoiding transaction fees. The market-timing issue relates to the question of which security should be used to satisfy the RMD whether distributed in-kind or not. The suggestion implied in the article is that it might be beneficial to use a depreciated security to satisfy a distribution, then hold the security outside the IRA so that subsequent appreciation will be taxable at long-term capital gains rates rather than at ordinary income tax rates as long as the security is held outside the IRA for at least a year.
Permalink Submitted by Janet Toot on Wed, 2019-08-07 21:18
Thank you for your response. We do not agree that “The only thing that doing an in-kind distribution of an RMD does is avoid the individual having to purchase the security outside of the IRA……avoiding transaction fees.”
Permalink Submitted by David Mertz on Wed, 2019-08-07 22:46
There is no tax difference between distributing a security in-kind and selling the security inside the IRA, distributing the cash, and repurchasing the same security outside of the IRA at the same valuation on the same day. The cost basis of the shares distributed in-kind is the FMV distributed, reported in box 1 of the Form 1099-R, and the holding period for long-term gains begins on the date of the distribution. The taxable amount of the IRA distribution and the tax consequences of any subsequent appreciation or depreciation are the same either way.
Permalink Submitted by Janet Toot on Thu, 2019-08-08 23:05
I already stated my opening paragraph: “The RMD tax is the same if it is taken as cash or in stock (in-kind), so the RMD tax is the same for all scenarios & does not become a part of these calculations.” I already stated in Scenario 1 and 2 the stock cost basis is as of the day of RMD.
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