Once you've reached age 70½, you must take a minimum required IRA distribution (MRD) each year. But if you don't need the cash to live on and you expect your IRA stock to increase in the future, consider taking an 'in kind' IRA distribution for improved tax benefits.
Recent economic conditions have hit many equities hard. Their lowered values have lowered the value of the IRA they're in. Since this year's MRD is based on possibly a higher IRA value at the end of previous year, you will pay tax on an irritatingly large MRD for 2008. To mitigate this, IRS has waived the 2009 MRD requirement altogether.
Equities – such as stocks – you bought in your IRA have a 'zero' tax basis. Whatever value you take out for your IRA distributions is taxed at ordinary income tax rates. And that includes all gains those equities made. Also, there's no deduction for any loss within an IRA.
Keeping those depressed equities in your IRA for a possible comeback within a year or two will have you paying ordinary income tax rates when you take them out in the future for both their value and any gains. That's a bad tax consequence of IRAs for appreciating equities.
Take an In Kind IRA distribution for reduced taxation
But if you expect those equities to appreciate, you have to withdraw your MRD, and you don't need the cash for living, you can capitalize on that future growth at a much lower capital gains tax rate. Do this by taking an 'in kind' IRA distribution.
You take an 'in kind' IRA distribution by requesting your IRA custodian to transfer the stock directly from your IRA account to a taxable account without cashing them in. Keep records on the value of that stock when it's transferred. It's on that value that you'll have to pay ordinary income tax as an IRA distribution. You'll have to come up with cash elsewhere to pay this tax.
But that stock value now becomes the basis of that transferred stock. If the stock appreciates three better tax consequences occur:
- Any gain will be subject to the low long term capital gains tax – and that's for gain above its new basis.
- You'll not have to pay any tax on any gain until you wish to sell it.
- Dividends will be tax yearly – but if they're qualified dividends, you pay at no more than the 15% rate (current rate in effect for 2009 and 2010)
Lastly, if the equities fall further and you decide their not worth holding for the future, you'll be able to take a capital loss deduction and use it to offset other tax on other income or IRA distributions.
Why not just keep it simple and sell the stock in the IRA account and buy it in a regular taxable account? Except for the transaction costs, it's the same result whether the stock appreciates or loses value. (The only thing that's unclear is the effective 'purchase date' of the in-kind stock distribution - if it is the original purchase date within the IRA, then there could be some advantage to the in-kind distribution if you think you'll want to sell the stock within a year at a profit.
Nice tip. I like the fact your not selling the stock just moving it. This way you do not lock in the loss and can make money. Wonder if that can be done in 401 k or if you have to convert to ira then do it.
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That is a great idea. You can also do the same when transfering iras and other retirement accounts from one broker to another. Like the fact your not cashing the stock out so your not looseing any money.
IRA Distribution Rules at Death
The distribution rules required at the death of an IRA owner depend on several things:
1. Did the IRA owner die before or after the “required beginning date”?
2. Who is the beneficiary?
In order to carry out the wishes of the IRA owner, evaluating both practical and estate planning implications of various decisions during the IRA owner's life is essential. Important choices occur when the IRA owner makes his beneficiary election and, if married, by the spouse after the death of the IRA owner
Thanks for the post. Learn something there. I think equities are going to continue to rise, it seems the worst of the financial crisis could be over. The dow looks like it may be heading back upto 10,000. It's standing at 9,600 right now. Hopefully this will benefit us all if we are close to retirement or not.
Good tip. On the other hand, there could be an advantage to converting an IRA to a Roth, paying tax on the lower value, and neither the owner, the owner's spouse or other beneficiaries will pay tax on distributions. Moreover, the MRD rules are out the window on the owner and spouse if married, but not other beneficiaries. So far, projections indicate that a Roth conversion is risky because for example a single owner might die soon after the conversion is irrevocable and the heirs might not be too happy. But the owner might be able to cover the risk at reasonable cost through term life insurance if young and healthy enough. Also, projections indicate that a Roth conversion makes more sense for high net worth individuals. Also, consider the asset protection lost when pulling money out of an IRA if the owner lives in a state where it's exempt from creditors.
That is a great idea. You can also do the same when transfering iras and other retirement accounts from one broker to another I think equities are going to continue to rise, it seems the worst of the financial crisis could be over.
I am surprised that you are recommending investment in an asset whose value is dependent on equities for people above the age of 70. With all due respect, a drop in value of equity will cause lot of problems for these guys.
Thanks for this post, and actually for the blog at all. That's the first blog, dedicated to the sphere of retirement, and its very helpful. I can note some things for my retirement.
That is a great idea. Hopefully this will benefit us all if we are close to retirement or not.
Important choices occur when the IRA owner makes his beneficiary election and, if married, by the spouse after the death of the IRA owner
Yea, right. Do you actually think that people would like to gamble when it comes to their retirement ?
Very clever and informative post, although I agree with CNA Training it terms of the length of the investment, those over 70 investing in 70 may well not have time on their side to ride out the fluctuations in price. Retirement planning is always a juggle, although this does provide an alternative option to cashing in
Having just ready a few of your articles I'm now quite worried as at the age of 41 I have made no plans for my retirement and I'm thinking that maybe I should........or should have! I feel like I've just tapped into a new world here, good info & useful. thanks
I agree with Ridge converting an IRA to a Roth, paying tax on the lower value, and neither the owner, the owner’s spouse or other beneficiaries will pay tax on distributions.
I'm intrigued that in the U.S there is tax on capital gains, however I am impressed at the methods used above to lower the rate paid. I am lucky that in New Zealand we do not pay such a tax - however I am guessing company taxes are much higher here!
Thats a great strategy Bob, especially since the S&P 500 which was around 900 at the time of your post has now increased to almost 1200.
A few of the posters here have some great additional info. I guess that is the whole point of the commenting board. I just wish the IRA deduction was raised from $5,000. If you have a SEP you can drop a ton of money but you are seriously limited with an IRA...
My IRA is just about nothing at the moment. My financial adviser told me to check out "Cool Springs Life Equity Strategy" for good long term protection.
That is a great idea. You can also do the same when transfering iras and other retirement accounts from one broker to another.
Your financial advisor knows his stuff, this is a good idea.
"My IRA is just about nothing at the moment. My financial adviser told me to check out “Cool Springs Life Equity Strategy” for good long term protection."
It's always a good advice to invest your hard-earned retirement money. It's hard to simply invest without thorough research.
Tax on the MRD is almost like getting taxed twice; you pay tax on your income and get exemptions on your IRA, but then again when you draw on your retirement funds. But you can mitigate it by transferring stock to an account which is only subject to regular income tax. Do I have this right? It's a little complex. Anyway good advice here and also in the comments, thanks folks!
That's a good idea. I've been thinking for a while about ‘in kind’ IRA distribution for the improved tax benefits and such. Good info, I'm going to do some more research on it.
Thanks for the information on IRA's. Much appreciated.
I had wondered about this tactic. I didn't know you could do this. I have an IRA rollover that had been desimated this last BIG drop and wiished I could transfer the value or the stocks into a Roth IRA since I had already lost most of its value. However, I did not want to cash it in but would prefer to see if it could ride high again sometime in the future. This is NOT the same thing as taking a distribution at retirement so I don't know if the IRS would allow the transaction. I wondered if I could do an In-Kind distribution to place into the ROTH though and pay the tax on the value at the time of distribution without cashing the stocks to take out. This would avoid the fees of selling.
Any ideas would be appreciated.
Financial institutions should offer reverse mortgage to seniors as it is a great way to ensure regular pensions for them after retirement. This offers added security for those who have few other income sources.
I had quite a lot of losses on the stock markets so I did manage to offset my tax with those losses, so your advice has worked for me in practical terms.
I had not heard of an in kind IRA distribution before reading your article. Thanks for the info it sounds like a better solution than converting an IRA to a Roth and then paying tax on the lower value, and neither the owner, the owner’s spouse or other beneficiaries will pay tax on distributions.
Your tips on taking an inkind IRA distribution are great. I wish I had read them prior to my parents liquidating their IRA's, for which they had to pay ordinary income tax. They could have strategized to minimize their tax liability had they known. Thanks for sharing.
great idea, but strange they are recommending investment in an asset whose value is dependent on equities for people above the age of 70
This is very interesting. Other countries all include this option for their IRA distribution. Good to see people can make a range of choices when retired.
You can also do the same when transfering iras and other retirement accounts from one broker to another.Good idea nad I really appreciate for this.
I have a 401 k and Im thinking about getting into IRA. is IRA pretty hands off? as I dont really even pay attention to 401k and it makes me money on a regular basis.
That's a great tip, I might say! You can also do the same when transferring IRAs and other retirement accounts from one broker to another by the way! That can help a lot as well. Keep up the good work!
I think that it just goes to show that getting expert advice as you approach retirement can pay dividends in the long term. Thanksfully you've kindly given us your expert opinion for free and that is appreciated.
Take an 'in kind' IRA distribution by having your IRA custodian send the shares directly from your IRA account to a taxable account. Maintain records on the value of that stock on the date of transfer as this is your new tax basis. It's on that value that you'll have to pay ordinary income tax as an IRA distribution. If the shares fall further and you decide to sell, you take a capital loss deduction and use it to offset other tax on other income or IRA distributions. You would not have been able to do so had the shares lost value inside the IRA.
Wont be much in the way of a retirement pot when most of us retire now! Good advice!
I like the fact your not selling the stock just moving it. This way you do not lock in the loss and can make money. Wonder if that can be done in 401 k or if you have to convert to ira then do it. On the other hand, it sounds like a dangerous strategy on the long run since you will increase your share value artificially and when you reach a certain limit, it tends to crash.
The retirement income can be considered as important , andi feel that it should be distributed wisely.
Quick Quid
I agree with CNA Training it terms of the length of the investment, those over 70 investing in 70 may well not have time on their side to ride out the fluctuations in price. They could have strategized to minimize their tax liability had they known. Hopefully this will benefit us all if we are close to retirement or not.
Take an 'in kind' IRA distribution by having your IRA custodian send the shares directly from your IRA account to a taxable account. Maintain records on the value of that stock on the date of transfer as this is your new tax basis. It's on that value that you'll have to pay ordinary income tax as an IRA distribution.
If you expect those stocks or equity funds to appreciate, but you need to take your IRA distributions, and you don't need the cash for living expenses, you can capitalize on that future growth at a much lower capital gains tax rate. Do this by taking an ‘in kind’ IRA distribution--remove the shares form your IRA. There is no requirement to cash them in first.
In order to carry out the wishes of the IRA owner, evaluating both practical and estate planning implications of various decisions during the IRA owner’s life is essential.