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Q. My IRA is in mutual funds, individual stocks and a money market fund. I usually take my required distribution in stock, but now that the market has fallen, I’m strategizing. I know I can take out stock without selling it. Is it more beneficial taxwise to take the stock or should I just take cash this year?
— Retired investor
A. First, know that because of the coronavirus pandemic and the recently passed CARES Act, you can skip your Required Minimum Distribution (RMD) this year.
If you choose to take your RMD, the tax benefit of taking an RMD in-kind — taking out the stock without first selling the shares — is limited.
Any withdrawal from a retirement account is taxed at your ordinary income tax rate, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York and an adjunct professor of personal finance at Montclair State University.
“The treatment is the same, whether you take your RMD in cash or in-kind,” he said. “When an RMD is taken in-kind, you pay ordinary taxes on the value of the asset — stocks, mutual funds, etc. You don’t pay capital gains taxes for the sale of the stock inside your IRA.”
If you take your RMD in-kind, the basis is re-set to the new value of the stock when the RMD is taken, Panambur said. The holding period also re-sets to the time the RMD is taken.
“So from a tax point of view, taking the RMD in-kind would be the same as selling the stock in your IRA, taking the RMD in cash and then buying back the stock in your regular taxable account,” he said.
The advantage of taking the RMD in kind is that it keeps you invested in the market and you minimize the risk that the price of the stock moves against you by the time you transfer the stock out of your IRA account, he said. Another advantage is that you avoid transaction fees, although these days transaction fee for stocks is negligible if not zero, he said.
“On the other hand, you also run the risk that if you take the RMD in-kind, the changing stock price could result in an insufficient RMD,” he said. “The IRS may levy a penalty of 50% on insufficient withdrawals.”
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