Stock can be used instead of cash to meet a required minimum distribution (RMD).
As you approach retirement age, it's essential to understand the rules surrounding RMDs from your retirement accounts. In particular, if you have an individual retirement account (IRA), you must start taking RMDs by age 72 (70 ½ if you reached that age before January 1, 2020), or face significant penalties.
One way to take your RMD is by transferring securities from your IRA to a regular taxable account in-kind. This approach can be a useful way to satisfy your RMD while maintaining your desired asset allocation. However, it's essential to understand the IRS rules for valuing in-kind transfers.
Let's say you have a traditional IRA with a balance of $500,000 and own 1,000 shares of Apple stock worth $200 per share. To satisfy your RMD, you would need to withdraw $18,248 from your IRA ($500,000 divided by the IRS's life expectancy factor of 27.4).
Instead of selling $18,248 worth of Apple stock and transferring the cash, you could transfer the shares in-kind to a regular taxable brokerage account. The IRS requires that the transfer be made at the fair market value (FMV) of the securities on the date of the transfer.
In our example, let's assume that the FMV of Apple stock on the day of the transfer is $190 per share. To calculate the value of the in-kind transfer for RMD purposes, you would multiply the number of shares transferred (1,000) by the FMV per share ($190). The result is $190,000, which satisfies your RMD for the year.
It's important to note that if the FMV of the securities on the date of the transfer is less than the RMD amount, you must transfer additional securities or cash to make up the difference. Conversely, if the FMV of the securities is higher than the RMD amount, you cannot carry forward the excess to satisfy future RMDs.
In addition, if you plan to transfer securities in-kind to satisfy your RMD, make sure that the securities are eligible for transfer. Some securities may not be eligible due to restrictions or limitations imposed by the issuer or the brokerage firm.
In conclusion, transferring securities in-kind from your IRA to a regular taxable account can be an effective way to satisfy your RMD while maintaining your desired asset allocation. However, it's essential to understand the IRS rules for valuing the transfer and to ensure that the securities are eligible for transfer. As always, it's a good idea to consult with a fee-only financial advisor to determine the best approach for your individual circumstances.
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