Here’s a way to keep your stock shares and hit the mark on your annual RMD goal at the same time.
If you are reluctant to sell off certain stocks in your IRA, but need to satisfy the IRA’s annual RMD (Required Minimum Distribution), this will come as welcome news. According to Kiplinger, in a recent article titled “Retirees, Shift Stock to Satisfy Your RMD,” an “in-kind” transfer provides the perfect solution.
There’s no requirement that you withdraw cash from your IRA, just that a certain amount has to be withdrawn each year starting at age 70½ for tax purposes. It’s fine to have stock or mutual fund shares transferred from your IRA to a taxable account to satisfy your RMD.
Retirees thinking about this move are those who are more likely not to need their RMD for spending money and who feel their stocks can grow in value. Another option is to sell the stock and use the payout from your IRA to repurchase the shares in a taxable account. However, a transfer has some advantages: (i) you’re certain to keep the money invested and (ii) you’re saving some money in transaction expenses.
To do this, calculate the amount you must withdraw from your IRA for the year by dividing your account balance as of December 31 of the previous year by the IRS factor for your age. That factor can be located in IRS Publication 590-B. You then tell your IRA custodian to transfer stock or mutual fund shares whose total value equals the RMD amount from the IRA into a taxable account.
Both you and the IRS will receive a 1099-R from the IRA custodian that shows a distribution of the amount that the shares were valued at on the day of the transfer. You’ll owe tax on the full amount, assuming you hadn’t made non-deductible contributions to the IRA.
Remember that the market can fluctuate between the time you request the in-kind transfer and when it is actually executed. Transfers are valued using the market close price on the day of transfer. Make sure to circle back with your custodian after the move is made to find out the actual value so you are certain to satisfy the RMD. If the transfer was short of your required minimum distribution, you’ll need to move more shares or withdraw cash. If you fail to do this, you’re subject to a penalty of 50% of the shortfall.
Do not wait until the last week of December to make this move. There’s a lot more to transferring stocks than pressing a button on your keyboard and if you wait too long and miss the deadline, you may find yourself with an expensive transfer. You should also bear in mind that when the shares move from the IRA to your taxable account, their tax basis changes to their value at the time of transfer.
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