Provided by Clark Kendall
It may seem unorthodox, but you can take an IRA distribution in a form other than cash. This alternative distribution is called an in-kind distribution and can make financial sense for older IRA owners as well as IRA heirs. An in-kind distribution from a traditional IRA is fully taxable, just as a cash distribution becomes taxable income. Just how is the cash value of the in-kind withdrawal determined? The fair market value of the asset is reported to the IRS as a step in the distribution.¹·²
Why would you want to make this type of IRA withdrawal? In certain cases, it may be preferable to withdrawing cash, especially when it comes to Required Minimum Distributions (RMDs) for traditional IRAs.
Maybe you want to keep shares instead of selling them. There are times when you may be reluctant to sell some or all of an investment to satisfy an RMD because the investment is really performing well. An in-kind withdrawal is an alternative. The amount of the distribution will be treated just like taxable income, but you will still own that asset once it is outside of the IRA. Those shares now have a chance to appreciate further, and you can also elect to donate them to charity.²·³
Maybe you have a cashless IRA. If 0% of your IRA assets are sitting in cash, then one option is to take either a partial or full in-kind withdrawal to satisfy the RMD requirement. You will still retain ownership of the asset(s) distributed in-kind.²
Maybe you see a loser turning into a winner. You hold a poorly performing investment in your IRA, but you suspect its value will soon rise. Rather than liquidate it, shares of it could be withdrawn from the IRA as an in-kind distribution. They will be taxed at their current value when distributed from the IRA as in-kind distributions are treated like taxable income, but in future years, they will only be subject to capital gains tax rates rather than (higher) income tax rates.4
Maybe the IRA has little value. Some “stray” IRAs are not worth very much. If an IRA holds an investment that has so little worth that it seems pointless to have the IRA in the first place, an in-kind distribution may offer a solution. If you own a traditional (or Roth) IRA and make this move before age 59½, you are likely looking at an early-withdrawal penalty as well as taxes. Even so, you may prefer that to keeping up the IRA for years, or carrying a loser investment in the IRA for any number of years while paying attached account fees.²
In-kind IRA distributions can be tricky, as they often involve shares. Share prices fluctuate, and if you are trying to precisely meet your RMD amount with a distribution of shares, there is the risk of coming up short or long. If you come up short, you will need another transaction to satisfy the RMD. If you come out long, that could increase the income tax attached to the RMD. This is the risk you take.5
About Clark A. Kendall, CFA, AEP®, CFP® Clark Kendall has more than 30 years of experience in investment management and wealth management strategies. He is among a select few wealth managers worldwide who have earned the triple designations of Chartered Financial Analyst (CFA), CERTIFIED FINANCIAL PLANNER™ (CFP®) and Accredited Estate Planner® (AEP®). He has been named one of the Washington metropolitan area’s top wealth managers by the National Association of Board Certified Advisory Practices (NABCAP) and the Washington Business Journal.
As a founder of Kendall Capital Management, Clark provides intelligent, independent financial direction to high-net-worth individuals and families in and around Montgomery County, Maryland – particularly Montgomery County’s “Middle Class Millionaires.” His financial planning analysis, strategies and approach to client service are designed with these clients in mind. As a fee-only, independent financial advisor, Clark is a fiduciary who is held to the highest standard of any professional advisor in the industry. He sits on the same side of the table as the client and utilizes his skills and talents to serve clients with these common goals and concerns.
Clark’s approach is to actively manage portfolios that meet his clients’ goals in a cost effective manner. As a fee-only, independent advisor, Clark has no allegiance or conflicts with other financial organizations for trading or product selection.
1 – tinyurl.com/hsdkwgn [1/19/14]
2 – newdirectionira.com/ira-info/distributions/what-is-a-distribution [2/3/16]
3 – azcentral.com/story/money/business/consumers/2015/12/22/right-size-your-portfolio-coming-year-nancytengler/
4 – time.com/money/2791159/how-are-stocks-taxed/ [2/3/16]
5 – marketwatch.com/story/should-you-take-stock-to-meet-required-minimum-distributions-2014-11-03 [11/3/14]