How to Do an In-Kind Distribution With an RMD

A required minimum distribution (RMD) is the amount of cash that an account owner and participant in a qualified retirement plan, who is also of retirement age, must withdraw each year from her employer-sponsored retirement plan, SEP, traditional IRA or SIMPLE individual retirement account (IRA).

As of 2020, the age at which these mandatory withdrawals occur is ​72​. On April 1 of the year that follows the year during which the account owner reaches the retirement age 72, she must withdraw the required minimum distribution that year and each subsequent year. Whether she withdraws more than that amount is at her discretion.

Some investors may prefer to hold an investment, rather than liquidate it and receive the proceeds to meet the IRS required minimum distribution requirement. In this case, an in-kind distribution is in order.

The required minimum distribution equals the retirement account's fair market value at the end of the year prior to the year in which your mandatory withdrawals must begin divided by your life expectancy, which equates to the expected distribution period. The Internal Revenue Service (IRS) provides a worksheet with which your retirement account custodian calculates your RMD and reports it to the IRS.

In the case of the Roth IRA, the RMD rules don't apply so long as the account owner is living. For other retirement accounts, including the Roth 401(k) account, the RDM rules apply.

Rather than liquidate an investment so you can take cash out of your account, you can reduce the account in the required amount by completing an in-kind distribution from your IRA. To do so, you simply move the investment you want to keep, such as stock, from your tax-advantaged retirement account into a taxable investment account, such as a brokerage account.

When you employ an in-kind distribution, you will be taxed on the value of the assets that you move. The asset basis is the value of the asset at the time of its transfer. This is sometimes referred to as an RMD transfer in-kind distribution.

To calculate the required minimum distribution for a given year, visit the IRS website and download the current version of the RMD worksheet that relates to your personal situation. For instance, your marital status and the age of your beneficiary will have a bearing on the calculation.

In general, as an IRA account holder, you will perform three steps to determine your required minimum distribution:

• Determine the balance of your IRA account as of December 31 for the year in question.
• Search through the table in the IRS worksheet for the line item that corresponds to your age in the current year and note the distribution period. For instance, using the 2021 worksheet, the distribution period for the age 72 is 25.6.
• Divide the fair market value of your account by the distribution period you identified for your age. The calculation will give you the current required minimum distribution.
• Notify your IRA custodian of the particular shares that you want to transfer to your taxable account in an amount equal to or greater than the RMD.
• As the RMD transfer in-kind distribution proceeds, verify there's been no change in the market value of the assets that you're transferring. If, for example, a drop in stock price occurs, you may need to transfer additional assets.

Assume that it's March 2021, your birthday is August 1, you are 72 years of age and the current value of your IRA is $350,000, although its value was $325,000 in December 2020. The distribution periods from the relevant IRS table are 25.6 for age 72 and 24.7 for age 73. The required minimum distribution equals $325,000 divided by 24.7, or $13,157.89.

Consequently, you should withdraw $13,157.89 in stock and arrange to transfer it to a taxable account. In the interim, you should monitor the stock's price. If the price falls, you'll need to increase the number of shares to be transferred.