O

[Brat]

I have "O", Reality Income in my IRA. I must take MRDs from here on out. The O cash dividends are adequate to do that. As I consider my MRDs should I take it in the form of a distribution in kind, start to move that investment out of my IRA? In addition to their cash dividends I do not know if they distribute depreciation to their shareholders.

My question is: use the cash distributions to meet MRDs and leave O in the IRA; take distribution in-kind using some of the cash to pay taxes on the distribution.

Which would you do?

 

[MooreBonds]

I also own O. It is similar to other REITs, in that it just spins off a combination of dividends, qualified dividends, capital gains, and return of capital each year. There aren't any "depreciation" distribution credits or such (unlike tax advantages of a Master Limited Partnership).

I would suggest you review your entire portfolio to see what holdings spin off which: it would make sense to hold stocks and such that spin off mostly qualified dividends in your taxable accounts to get the 15% tax rate, versus keeping them in your IRA, and then paying marginal tax rates when withdrawing the same dividends, along with any Return of Capital and Long Term Cap Gains that some REITs spin off.

 

[Brat]

O is the only holding in my IRA. DH's largest holding is Wellesley.
We are in the 15% tax bracket.

Is one better than the other to distribute in-kind?

 

[Animorph]

You could just MRD the cash and buy O or Wellesley in your taxable account. Or MRD Wellesley, sell it and use the cash or buy O. The exact method of how it got there, cash or in-kind, is immaterial.

The only important thing is what do you want in your taxable account and what in your IRA, and make sure it fits within your overall AA. That's probably not more and more cash, in either set of accounts.

 

[MooreBonds]

O is the only holding in my IRA. DH's largest holding is Wellesley.
We are in the 15% tax bracket.

Is one better than the other to distribute in-kind?

From my 2012 income tax return info:

Realty Income:
163.56
75.4% of distributions were ordinary dividends
24.6% of distributions were nondividend (return of capital) distributions.

Wellesley:
69.6% of distributions were dividends
(42.8% regular dividends; 26.8% qualified dividends)
30.4% of distributions were capital gains

Looking at your O:

If you have 1/4 of your O distributions as return of capital, you technically have to track that and subtract it from your cost when you sell it, if it's in a taxable account. Since your O dividends will be taxed at the same 15% either way, it you would qualify for 0% capital gains taxes, then it would make sense to take your O shares and hold them in your taxable account, since you would receive your return of capital distributions (tax-free), sell it at a capital gain down the road, and then enjoy 0% capital gains taxes when you sell it (if you do qualify for 0% cap gains).

Looking at Wellesley:
You have more capital gains distributions from Wellesley than from O...but capital gains aren't as consistent as dividends from a REIT.

So, bottom line - since the return of capital from O is more 'consistent', it would produce net capital gains when you sell your position that would be taxed at 15% (or lower), while the Wellesley will not always produce about the same level of capital gains.

Therefore, I would recommend you hold your O in your taxable account. Either withdraw the shares in-kind, or sell it and buy it in your taxable account.

 

[Brat]

Thanks