Should You Take Your RMDs ‘In Kind’?

For the past few years, my advice for where to go for required minimum distributions was straightforward: Prune your RMD from your IRAs or other RMD-subject accounts by selling some stocks or stock funds, preferably growth-oriented US equities.

Required minimum distributions aren’t negotiable once you turn age 73, but people who are subject to them do have the opportunity to improve their portfolios at the same time. The IRS requires that you take the proper amount from RMD-subject accounts by year-end, but the rules don’t specify which investments you tap to meet those distributions. Given that leeway, I like the idea of selling whichever part of your portfolio you wanted to lighten up on anyway, either a problematic holding or something that’s consuming too large a share of your portfolio. In recent years (notwithstanding 2022), selling growth-oriented US equities would have helped reduce risk in retirees’ portfolios at the same time they met their annual obligation to the IRS.

But when the market falls, where to go for RMDs may be murky. Unless you maintain dedicated cash holdings to meet RMDs or you’re spending your IRA holdings’ income distributions to satisfy your RMD requirements on an ongoing basis, you may be scratching your head about where to go for RMDs in a down market. Rebalancing opportunities probably won’t beckon, and you may not want to disrupt your IRA holdings when they’re down.

That’s where in-kind distributions can come in. They won’t help you reduce your tax bill; your RMD-related taxes are already cooked because they’re based on your balance as of the preceding year-end. But assuming you don’t need the RMD for living expenses, a transfer in-kind of securities from your IRA to a taxable brokerage account may make sense. Not only can it help you maintain the same market exposure, just in a different part of your portfolio, but the transfer may also reduce the taxes due on future appreciation when you eventually do sell.

RMDs in Review

Required minimum distributions apply to a host of tax-deferred accounts—IRAs, 401(k)s, and SEP IRAs, for example—once you pass age 73. (Roth IRAs and 401(k)s are not subject to RMDs.) The idea is that the government has allowed you to enjoy tax-deferred compounding on your money, but at some point the funds have to start coming out of your accounts and you need to pay the taxes that are due. You calculate your RMD for each year by dividing your balance(s) by what’s called a life-expectancy factor, which means that your percentage withdrawal steps up as you age. (The calculation makes generous assumptions about life expectancy, which is why I’d say that most retirees shouldn’t sweat spending their RMD amount, especially if they need the funds to live on.)

One thought that might have occurred to you is whether it’s possible to reduce your RMD, and in turn the tax bill, by timing the distribution—specifically, taking your RMD at a point in the year when your account is at a low ebb. But Congress is a step ahead of you on that one: Your RMD for the current year is calculated by looking back to Dec. 31 of the previous year, so there’s no finessing the timing. For 2025 RMDs, for example, retirees look back to whatever their balance was as of Dec. 31, 2024.

When In-Kind Distributions May Be a Fit

I usually urge RMD-subject investors to take their distributions from whichever holdings they’d most wish to peel back on anyway, usually because appreciation has made the position larger than they’d like. But if the market or even a specific holding has fallen, there’s another avenue to consider: taking the distribution “in kind” rather than liquidating depressed securities from your IRA in order to meet your RMD. An in-kind distribution means that you receive the actual securities rather than cash, and move them into a taxable brokerage account.

There’s no RMD-related tax benefit to doing so, as discussed above. Instead, a key benefit is from an investment standpoint. By pulling securities from your IRA to meet your RMD and then transferring them in kind (and importantly, using non-IRA assets to pay any taxes due), there’s no slippage in terms of performance. By contrast, if you liquidate securities from your IRA to meet your RMDs and then use those funds to rebuy those same holdings for your taxable account, the security price(s) could change in the interim. More worrisome still—and this is a particularly big deal for volatile positions like individual stocks—they could shoot up, meaning that you’d need to rebuy at a higher price. An in-kind RMD can help you meet your obligation to the IRS while simultaneously maintaining consistent exposure to the depressed security or market segment.

Moreover, there may be a tax benefit to the in-kind distribution—not right away, but eventually, if the security eventually bounces back and you sell it from your taxable account. That’s because when you move those same securities to a taxable brokerage account, any appreciation beyond the price when you made the distribution will be taxed at the capital gains rate rather than your ordinary income tax rate. In other words, you may have spirited the securities out of your account with a relatively low tax bill attached to them.

Say, for example, a 75-year-old in the 32% tax bracket takes an in-kind RMD of a stock position worth $50,000 to fulfill his RMDs. He’d owe $16,000 in taxes on the distribution—ideally paying the taxes with separate assets. If the stock appreciates to $80,000 during the next three years and he decides to sell, his tax bill would be $4,500—his $30,000 in appreciation multiplied by the 15% capital gains rate.

By contrast, say that same retiree opts to hang on to the depressed stock within the IRA and takes a distribution of $50,000 in cash from a money market fund instead. His tax bill on the RMD would be the same—$16,000. But if he were to eventually sell the once-depressed stock from the IRA at a market value of $80,000, his tax bill on that distribution would be $25,600.

To sum up, in-kind distributions serve two key goals: helping you maintain consistent exposure to a depressed security and potentially reducing the taxes that would be due upon the position’s eventual sale. They’re a decent way to take advantage of market weakness—or recently weak performance in a specific holding—to improve your future bottom line.