In-kind withdrawal from IRA for RMD

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citrine24
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In-kind withdrawal from IRA for RMD

Post by citrine24 »

Hello all. I have only bond funds (VBTLX and VTABX) in my traditional IRA, and little cash there as I reinvested the bond dividends until a few months ago. I have to make my first RMD this year, and I plan to do it before the end of 2022 to avoid double withdrawals in 2023. I don't need the RMD funds to live on and I have enough cash elsewhere to pay the taxes on the RMD. My question is: does it make sense to move the appropriate amount of bonds in-kind to my taxable account to avoid selling them at the depressed price this year? I'm not sure I'm thinking this through correctly, especially regarding having those bond funds in my taxable account. Any help would be appreciated.
sport
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Re: In-kind withdrawal from IRA for RMD

Post by sport »

You can move the shares in kind, or your can sell the shares in the IRA, move the cash to your taxable account and then buy the shares in the taxable account. The only difference is that when you move the shares in kind, you will avoid being out of the market for a day or two while the transactions take place. So, I would do whichever is easier. If you are charitably inclined, don't neglect to make Qualified Charitable Distributions (QCDs) to your charities before you complete your RMD. QCDs are tax free and count towards your RMD. You can do this and still take the standard deduction. QCDs may also save on your state income taxes.
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galawdawg
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Re: In-kind withdrawal from IRA for RMD

Post by galawdawg »

Yes, you can certainly transfer the appropriate number of shares for your RMD from your IRA to taxable, particularly since you have sufficient cash flow to pay the tax liability associated with your RMD.

Of course if you are a charitable sort and age 70½ or older, you can also do a QCD to donate your RMD to charity. You may want to consider that, particularly if you already donate cash to the charity or charities you prefer. Since the full amount of your QCD (up to $100k) is excluded from your taxable income, there advantages to doing a QCD rather than donating cash.
exodusNH
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Re: In-kind withdrawal from IRA for RMD

Post by exodusNH »

citrine24 wrote: Wed Nov 23, 2022 3:46 am Hello all. I have only bond funds (VBTLX and VTABX) in my traditional IRA, and little cash there as I reinvested the bond dividends until a few months ago. I have to make my first RMD this year, and I plan to do it before the end of 2022 to avoid double withdrawals in 2023. I don't need the RMD funds to live on and I have enough cash elsewhere to pay the taxes on the RMD. My question is: does it make sense to move the appropriate amount of bonds in-kind to my taxable account to avoid selling them at the depressed price this year? I'm not sure I'm thinking this through correctly, especially regarding having those bond funds in my taxable account. Any help would be appreciated.
It's possible, but not all brokerages make this easy or have the staff that understand it's possible.

You could take N days and make withdrawals of $RMD/N to cash and immediately buy similar bonds in taxable to minimize the amount out of the market. Or, if you have cash already available, buy $RMD/N with that cash and take the distribution as cash.

Because this is an IRA, you probably want to avoid holding "substantially identical" bond funds, to allow tax-loss harvesting. E.g., if you're IRA holds BND, hold VGIT in taxable.
Alan S.
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Re: In-kind withdrawal from IRA for RMD

Post by Alan S. »

Unless your brokerage permits distributions based on dollar values and not share numbers, you will not be able to control value changes between your distribution order the time the distribution is processed. That would result in falling short or overshooting your RMD.

One way to manage this is to undershoot the in kind distribution by perhaps 3% (more if you are distributing volatile holdings), then filling in the shortfall by distributing cash a couple days later.
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Watty
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Re: In-kind withdrawal from IRA for RMD

Post by Watty »

citrine24 wrote: Wed Nov 23, 2022 3:46 am I'm not sure I'm thinking this through correctly, especially regarding having those bond funds in my taxable account.
What you may be missing is that when you are looking at your asset allocation then you look at all your accounts combined and figure out your desired asset allocation. You then position your investments on the accounts where they are the most tax efficient. There is a wiki on this.

https://www.bogleheads.org/wiki/Tax-eff ... _placement

Doing an in-kind withdrawal might be possible but it is opening a lots of ways that can open up a chance for Murphy's Law to cause problems. It almost always makes sense to just sell the holding, move cash, then rebuy it again once money is in the taxable account. That will also make the cost basis easier to track.

I would only do an in-kind withdrawal if there was some compelling reason to like there was a closed mutual fund that you could not reinvest in.

Doing an in-kind transfer between taxable account could make sense in some situations but that is a different situation.
Last edited by Watty on Wed Nov 23, 2022 10:10 pm, edited 2 times in total.
drzzzzz
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Re: In-kind withdrawal from IRA for RMD

Post by drzzzzz »

This question always strikes me as being complicated and is it worth the time? I can easily sell shares myself in an IRA and transfer the funds electronically to my connected brokerage account/bank without having to be on the phone waiting for someone to do an in-kind transfer and not knowing whether it will work as requested. Is being out of a bond fund for a day or two that big a deal on an RMD? And as others have mentioned if you are over age 70 and charitably inclined giving all or part of the RMD to charity is a win-win (no one pays any taxes).
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celia
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Re: In-kind withdrawal from IRA for RMD

Post by celia »

Watty wrote: Wed Nov 23, 2022 10:08 pm Doing an in-kind withdrawal might be possible but it is opening a lots of ways that can open up a chance for Murphy's Law to cause problems. It almost always makes sense to just sell the holding, move cash, then rebuy it again once money is in the taxable account. That will also make the cost basis easier to track.
I disagree. All of our IRA withdrawals were in-kind and there were no problems as long as both accounts were at the same custodian. Breaking it up into 3 steps seems like there are three chances something could go wrong instead of one. And there would be no chance you’ll forget to do the later steps. You can even transfer from Fund A in the tIRA to Fund B in the Taxable, all in one step.

The same is true for when we did Roth conversions. The only difference is the destination account.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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ResearchMed
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Re: In-kind withdrawal from IRA for RMD

Post by ResearchMed »

celia wrote: Wed Nov 23, 2022 10:43 pm
Watty wrote: Wed Nov 23, 2022 10:08 pm Doing an in-kind withdrawal might be possible but it is opening a lots of ways that can open up a chance for Murphy's Law to cause problems. It almost always makes sense to just sell the holding, move cash, then rebuy it again once money is in the taxable account. That will also make the cost basis easier to track.
I disagree. All of our IRA withdrawals were in-kind and there were no problems as long as both accounts were at the same custodian. Breaking it up into 3 steps seems like there are three chances something could go wrong instead of one. And there would be no chance you’ll forget to do the later steps. You can even transfer from Fund A in the tIRA to Fund B in the Taxable, all in one step.

The same is true for when we did Roth conversions. The only difference is the destination account.

I agree with celia.

Moving the holding "in kind" should leave *less* opportunity for something to go wrong. It starts as X shares of A, and ends with X shares of A.
You'd need to pay the taxes separately, of course, unless you wanted separately to sell some of A to withdraw and withhold for taxes. But that's a separate and simple step and shouldn't cause any interference with the "in kind" transfer.

We've only done this with truly "in kind", not changing from holding A to B in the same transaction.

RM
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Topic Author
citrine24
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Re: In-kind withdrawal from IRA for RMD

Post by citrine24 »

Thank you all very much. Yes, I realized a bit late there's not much difference except for the transactional issues, when looking at total asset allocation (as long as I rebuy the bonds in taxable if I use the cash method). But I have to think about the impact of having bond income in the taxable account. Will research that.
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celia
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Re: In-kind withdrawal from IRA for RMD

Post by celia »

citrine24 wrote: Thu Nov 24, 2022 2:37 am But I have to think about the impact of having bond income in the taxable account. Will research that.
In that case, you should read our wiki page for Tax-efficient Fund Placement. That page is quite complex, but basically it says:

* Roths should hold only stock funds to maximize your tax-free growth.
* Tax-deferred accounts should hold bond funds, since the interest they earned doesn’t get any tax preference on a tax return.
* Taxable accounts should hold only “index” funds since those funds are more tax-efficient (and throw off fewer dividends). International funds that pay taxes to Foreign governments should also be held there so you may qualify for the Foreign Tax Credit on your taxes.

Of course, your desired Asset Allocation is more important and the space you have in each tax category (Roth, Tax-Deferred, Taxable) usually doesn’t match your desired AA. So just do the best you can when assigning different assets to different types of accounts.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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grabiner
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Re: In-kind withdrawal from IRA for RMD

Post by grabiner »

Another reason not to withdraw in-kind is that you might want a different fund in your taxable account. If you are in a high tax bracket and hold bonds in your taxable account, they should be munis. If you are in a high-tax state, you should hold in-state munis, or Treasury bonds which are exempt from state tax.
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dbr
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Re: In-kind withdrawal from IRA for RMD

Post by dbr »

Given that stocks have fallen farther than bonds lately it is possible you want to sell bonds (in the IRA) and buy stocks (in taxable).

Anyway the idea that you are selling something that is down is just one step in all the things you might do and irrelevant as such.

It can be true that withdrawals from tax advantaged space, which reduce how much can be held there, tend to upset your previous asset allocation and asset location a little bit. Usually you can just allow a little slop to happen and not worry about it.

Note one thing I do with my RMD is designate tax withholding to cover my entire tax payment for the year as withholding at year end is considered to be timely for income at any time of the year, unlike estimated tax payments which have to be on time during the year.
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Lee_WSP
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Re: In-kind withdrawal from IRA for RMD

Post by Lee_WSP »

grabiner wrote: Thu Nov 24, 2022 1:15 pm Another reason not to withdraw in-kind is that you might want a different fund in your taxable account. If you are in a high tax bracket and hold bonds in your taxable account, they should be munis. If you are in a high-tax state, you should hold in-state munis, or Treasury bonds which are exempt from state tax.
Or buy it in the retirement account and transfer those.
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