When to take my RMD

[Geld ist Freiheit]

I have an inherited IRA and take in-kind distributions, moving X shares to my taxable account to maintain my position. I cover the taxes through extra withholding from ... that which we dare not speak its name.

Is it better to move the shares when the price is:

A) down, establishing a lower cost basis in the taxable account

or

B) up, using fewer shares to satisfy the RMD thereby leaving more shares in the tax advantaged account longer

or

C) long term it doesn’t really matter. Stop over thinking things.

For what it’s worth, I don’t plan on needing the money for 10+ years.

 

[VanWinkle]

I would just set up a schedule and stick to it. You will get lower prices sometimes and higher prices on other times. Much easier than trying to time withdrawals based on the market.

 

[pacergal]

I would just set up a schedule and stick to it. You will get lower prices sometimes and higher prices on other times. Much easier than trying to time withdrawals based on the market.

Agree. I have a small inherited IRA, we simply take distribution every December like clockwork.

 

[audreyh1]

Since you have to meet a $ amount regardless (move more shares if prices are down), I doubt it matters much in the long run.

 

[Dash man]

If there is a big drop in the market as we had in March 2020, I’d move a lot of shares if I were you. Take advantage of moving more shares for less tax! I take advantage like that for my Roth conversions.

 

[dmpi]

Assume that you somehow knew the market would be down and then up vs. up and then down...it's better then have your stock appreciation in a regular taxable account because you can take advantage of the lower long-term capital gains tax. So I would say A) is the better scenario.

 

[HarveyS]

C

 

[SecondCor521]

Thanks for posting this. I was unaware that one could do in-kind distributions from IRAs, simply because I'd never heard of it being done. But it can be. Cool.

As for your question, I don't think it makes any difference. Your RMD is $X. Regardless of the number of shares (many or few) it takes, after an in-kind distribution, you'll end up with some shares in your taxable account that are worth $X and have a basis of $X.

Approximately, of course. The share value might fluctuate a bit, and you may have some rounding or partial shares that affect it at the margin.

I think a better question is whether you want to move $X sooner or later: assuming $X is growing, is it better to grow deferred in the IRA or at cap gains rates in taxable? I think the answer to this question isn't clear cut and depends on several different things: What sort of distribution schedule is the IRA on - SECURE 10 year or lifetime RMD or other? What cap gains rate would the taxable be subject to? What ordinary income tax rate would the RMD be subject to?

 

[jazz4cash]

In this case, what is the advantage to an in-kind transfer? How is basis determined?

 

[VanWinkle]

There is no advantage to taking RMD as an in kind transfer to taxable unless the basis is reset as it would be if you took the RMD as cash and bought the same mutual fund in your taxable account. The basis would be the same as the purchase price the day it was transferred IMO.

 

[Bamaman]

I thought you paid taxes on inherited 401K's as you drew the funds out of the IRA Rollover account. And that most had to be withdrawn within the 10th year.

Does basis even matter since you're paying the tax on the entire withdrawal?

 

[audreyh1]

In this case, what is the advantage to an in-kind transfer? How is basis determined?

Basis is the value the days it’s withdrawn. So if you do the entire RMD in kind, and you’ve withdrawn $X, the basis is $X. How they set the price of a daily fluctuating asset like a stock upon withdrawal - good question!

Note, there is no opportunity to withhold taxes if you withdraw entirely in kind, so you’ll be paying the incurred taxes later. Just know that for tax planning, or do it partially, or whatever.

Tax-wise it’s neutral. You could sell the asset in the IRA, withdraw the cash and buy the same asset in your taxable account. Other than say intraday fluctuations it would be the same.

So it’s more an issue of convenience if you want to continue to hold the asset.

Note also, that in addition to establishing a basis, the holding time is set to 0, so you’ll have to hold the asset for a year to get long term cap gains treatment.

 

[audreyh1]

I thought you paid taxes on inherited 401K's as you drew the funds out of the IRA Rollover account. And that most had to be withdrawn within the 10th year.

Does basis even matter since you're paying the tax on the entire withdrawal?

You need the basis established for when you sell the asset in the future. You’ll still be liable for taxes on the entire IRA/401K amount whether withdrawn in kind or in cash.

 

[SecondCor521]

Basis is the value the days it’s withdrawn. So if you do the entire RMD in kind, and you’ve withdrawn $X, the basis is $X. How they set the price of a daily fluctuating asset like a stock upon withdrawal - good question!

Normally it's done by taking the average of the high and the low price of the stock on the date in question - in this case presumably the day the stock left the tax-deferred account.

I'm not 100% sure that is how it's done in this specific scenario, but that's how it's done in other similar scenarios, such as step-up in basis on date of death.

 

[audreyh1]

Interesting if they use that method to determine the amount you actually withdrew.

 

[SecondCor521]

Interesting if they use that method to determine the amount you actually withdrew.

I would expect they do. The actual in-kind distribution probably takes place after market hours. Also, there is no purchase or sale of the stock in an in-kind distribution, so they can't tie it to a specific price in the market. The prices fluctuate during the market, as you point out. A value needs to be determined, and this method is at least simple and reasonable.

I think, but don't know for absolute certain, that the IRS uses the average of high and low as a general rule for when these kinds of things crop up. I consider it similar to the "born on the 1st of the month" aspect of SS, which affects when you can claim, what month FRA is, etc. I think SS is consistent with applying that idea, but again not completely certain.

 

[audreyh1]

Gifting of appreciated stock: for the IRS charitable deduction they use average of highest and lowest price that day for the fair value, whereas the amount that goes in the DAF is what the DAF actually sells it for.

So I can imagine that transferring shares the IRS would want the same kind of thing for “fair market value” to establish the basis.

In the case of transferring mutual fund shred there is only the daily closing value so that’s easy.

 

[Winemaker]

IIRC, when I made mom's RMD in kind to her personal account with Fidelity, her basis was based on the end of day close. I also made sure there was cash there in the account to pay her 20% federal tax.

 

[ncbill]

I just take mine at the end of the year so I know how much room I have left in the 12% bracket to do Roth conversions.

Conversions to my Roth IRA are from my traditional IRA, not the one I inherited, of course.

 

[jazz4cash]

There is no advantage to taking RMD as an in kind transfer to taxable unless the basis is reset as it would be if you took the RMD as cash and bought the same mutual fund in your taxable account. The basis would be the same as the purchase price the day it was transferred IMO.

OK, in that case I guess I choose C in response to OP's question unless there is some basis in the IRA. It seems like that would be stepped-up for an inherited IRA.

 

[audreyh1]

IIRC, when I made mom's RMD in kind to her personal account with Fidelity, her basis was based on the end of day close. I also made sure there was cash there in the account to pay her 20% federal tax.

Was that for a stock or mutual fund?

 

[Winemaker]

Was that for a stock or mutual fund?

Stocks.

 

[audreyh1]

Thanks! Good to know!

I suppose it’s possible that different brokerages that allow transfer in kind, have different ways of assigning the basis.

 

[SecondCor521]

OK, in that case I guess I choose C in response to OP's question unless there is some basis in the IRA. It seems like that would be stepped-up for an inherited IRA.

Distributions from inherited IRAs are always ordinary income to the beneficiary regardless of anything that happens within the IRA.

That is separate from the notion of an IRA with basis which gets inherited; in that case the basis of the IRA is inherited but not stepped up. (IRAs with basis are generally because of after-tax contributions to the IRA by the original owner.)

Basis step up generally only applies to non tax-deferred assets, such as taxable brokerage accounts, houses, and tangible personal property.

Thanks! Good to know!

I suppose it’s possible that different brokerages that allow transfer in kind, have different ways of assigning the basis.

It's possible that brokerages assign basis differently. I wonder if the IRS has one "right way" to do it that they've defined, or if they allow multiple methods. I would have expected "high/low average" to be the method, but end-of-day might be permissible.

 

[Geld ist Freiheit]

In this case, what is the advantage to an in-kind transfer? How is basis determined?

I did the in-kind transfer to maintain my position.

The transfer was AAPL on 11/18/21.
My new basis shows to be $153.49.

For the mathematically inclined:
Brokerage chart shows
Open: $153.71
High: $158.67
Low: $153.05
Close: $157.87

First one to reverse engineer the methodology gets a gold star. Show your work.