When investors see the value of their equities fall, they don’t like selling shares in order to take required minimum distributions. Slott pointed out that investors who don’t wish to sell their equities can transfer the shares into a non-IRA account, which will meet the RMD requirement.
Consider the following example. Mr. Jones is required to take an RMD of $5,000 in 2022, based on his age and the value of his IRA at the end of 2021. He is considering selling shares of XYZ Co., which he purchased for $5 a share several years ago and which is now selling for $10 a share. If he sells 500 shares, this will meet his RMD requirement for 2022. However, Mr. Jones feels that, in the long-run, he would like to hold onto stock in XYZ because he feels strongly that the shares will increase in value in the future.
Rather than sell 500 shares, Mr. Jones can transfer them to a non-IRA account within the same financial institution he holds his IRA. This action will allow him to continue to hold the 500 shares in his portfolio, and still meet the RMD requirement.
The marginal tax rate of Mr. Jones is 28 percent. So, when Mr. Jones prepares his tax return, and indicates that he withdrew $5,000 from his IRA, he will have to fund $1,400 ($5,000 x 0.28) as part of his year 2022 tax liability, because he is not receiving any funds from the transfer of shares.
For income tax purposes, the cost basis for the shares in the non-IRA account will be the value of the shares at the time Mr. Jones transferred the stock to the non-IRA account. He will receive a 1099-R form, which he should save for tax purposes. So, Mr. Jones’ cost basis in this example is approximately $10, not the cost of his shares when he purchased them for his IRA account. So, if he eventually sells the shares for $12, for example, after he held them in the non-IRA account for longer than one year, he would report a long-term gain of $2 per share if the 1099-R indicated the value of the shares when he transferred the stock was $10 per share.
Slott suggested that it is prudent not to have all of your IRA investment in equities, so that you will have more flexibility when you are required to take RMDs and have to consider liquidating them at a time when equities have fallen in value.
Naturally, if you do decide to use the alternative of transferring stock to a non-IRA account to meet your RMD requirement, you must have other assets when you file your tax return since your increase in income tax will be based on the RMD multiplied by your marginal tax bracket. You will not be receiving any funds to pay your taxes when you distribute the shares to the non-IRA account.
If you decide to take your RMD from the sale of conservative investments in your IRA, rather than selling or transferring equities, such as a money market fund, or short-term bond fund, you can withhold part of the distribution for income tax obligations. Current regulations require a minimum of 10 percent withholding if you take any withholding for tax purposes. This alternative makes sense if you anticipate that otherwise you will not have sufficient liquid assets if you don’t expect a refund when you file your taxes.
(Elliot Raphaelson welcomes your questions and comments at [email protected].)
