How to Do an In-Kind Distribution With an RMD

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Once you reach age 70 1/2, the IRS requires that you begin taking minimum distributions, known as Required Minimum Distributions or RMDs, from your Traditional IRA. However, you don't need to liquidate any investments when you take your RMD. Instead, you can arrange with your broker to transfer assets "in kind" to a taxable brokerage account. Your broker will assign a fair market value as of the date of the distribution (that is, the transfer of assets from the IRA to the brokerage account) and issue a Form 1099-R showing the market value of the distribution for your tax return.

Things You'll Need

  • Most recent statement from your IRA custodian (brokerage company)
  • Broker's phone number
  • Taxable brokerage account
  • Your brokerage company's IRA distribution request form
  • Pencil
  • Calculator

Taking Your Required Minimum Distribution In Kind

  • Open a taxable brokerage account with the same brokerage company that holds your IRA if you do not already have one.

  • Call your brokerage company and ask to confirm your required minimum distribution for this calendar year. Most brokerage firms will have this information readily at hand, particularly if you have had your IRA with them for many years.

  • Review your statement and see which investment you would like to use for the distribution. As long as the investment value on the date of transfer is equal to or greater than your RMD, your distribution requirement will be met. Bear in mind that you can transfer shares in increments of one and bonds in increments of $1,000 of face value. You can also break up investments and keep shares in both accounts.

  • Download and print your broker's IRA distribution form. Most forms of this type will include an area where you can instruct your broker to make your distribution "in kind," listing the name and number of the shares you wish to have transferred. Be sure to include the account number for your taxable brokerage account.

  • Complete any tax-withholding election on the distribution form. You would typically elect to have no tax be withheld for an in-kind transfer, since only cash may be withheld for tax purposes. If you do wish to have taxes withheld, you will either need to use cash already in the account or instruct your broker to sell shares for this purpose.

  • Give your broker three to five business days from the receipt of your distribution form to complete the distribution from your IRA. Follow up if you do not see the transferred shares in your taxable account within seven business days.

  • Ask your brokerage firm to update the cost basis of the transferred shares. Your broker should provide this information as a matter of course, but make sure you have it for future tax purposes.

Tips & Warnings

  • You may be able to do everything you need online, either via email instructions or by completing an online IRA distribution form.
  • Provide some "wiggle room" in case your shares lose market value between your distribution request and the actual transfer date.
  • Even though you might have held the transferred shares in your IRA for years, bear in mind that the shares in your taxable account begin a new holding period as of the date of transfer. You will want to hold them for at least one year and one day to establish a long-term holding period so that you can take advantage of the lower long-term capital gains rate when you decide to sell.

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References

  • Photo Credit investment image by Kit Wai Chan from Fotolia.com a puzzle image by Pavel Bernshtam from Fotolia.com
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