MRD From IRA made in-kind?

[bzorc]

Is it allowable for a Minimum Required Distribution from an IRA to be made "in-kind"? For example, instead of taking a $10,000 MRD in cash, could an IRA holder take 500 shares of ABC corp stock with a fair market value at the time of distribution of $20? The transaction of course is treated as $10,000 of taxable income. Does the $20 fair market value then become the basis of the stock for the account holder?

I don't see why this can't happen, but would appreciate any comments and cites, if they are available. Thanks.

[BPickerCPA]

You can take distributions in kind. It's exactly as you stated - the fair value is taxable, becomes the basis, and the holding period starts on the date of the distribution.

[John G]

It would seem that the primary reason for doing this is to avoid a sales commission and a purchase commission... and possibly a small "spread" between bid and asked. In an era of internet based trading fees and tiny spreads, the transaction costs would not seem to be that imposing. For example an 8% distribution from a million dollar IRA would be 80k or 180 shares of GE which would might require a 2x trade that would still total far less than $100.

Arguing against this position is the odd lot amounts and difficulties of getting the right number of shares on the exact date with a specific stock price. I would not be surprised if custodians discouraged this as it appears to me that IRA departments are just not set up for same day prossessing services. A custodian can imposed more restrictive rules than the IRS allows... they often do, held only in check by competitive market pressures for service.

I would be curious if there would be a tenderancy in the internet brokers saying no for cost reasons.

You might want to think of the MRD as at annual rebalance the portfolio signal. Sell off a non-performing stock or part of something that has begun to dominate the portfolio.

The few MRD portfolios that I have examined seem to cover most of the distribution out of accumulated dividends or MM yield.

[BPickerCPA]

John,

My guess is that in kind distributions are not used for MRD distributions, at least not with a large degree of accuracy. I would think (and the few cases where I've seen it) is that the participant tells the broker to transfer X shares of ABC stock out of the IRA to the taxable broker account (or possibly send a stock certificate, but I'm sure there's a charge for that). The broker will report the 1099 based upon the value on the date of transfer. The responsibility to meet or exceed the annual MRD is on the participant.

As an additional thought, if one did desire to take the MRD in kind, one could ask for a distribution of, say 100 shares of GE, and after the actual transfer value is determined, and it's known that only, for example, 82 shares are need to satisfy the MRD, the other 18 shares could be returned within 60 days.

I would also add, from my experience, that very few IRAs in pay status are currently being held at discount/internet brokers. That will probably change as the boomers age.

Barry

[John G]

Thanks Barry. I guess a good conclusion is that while technically possible with some but not all custodians, in-kind transfers are likely to be messy, soak up time, possibly involve extra fees and may be inaccurately completed. I don't think I would ever go that route.

Barry, you are right on target about seniors and the internet based brokerages. I see a lot of folks past the age of 65 that still have the stock certificates in the safe deposit box. It took me four years to convince my parents of the value of a brokerage account to automatically track splits, spinoffs, mergers, dividends and of course provide a daily cash sweep. There seems to be some underlying trust issue concerning paper vs. electrons.... a generational thing.

[Guest mcdonnell]

We make in-kind distributions quite often. The primary reason that clients request this is because they do not have enough cash in their accounts and they want to maintain the security positions as part of their portfolios. We make the distributions by transferring the shares to their retail accounts (individual, joint, etc.). The shares are being held in street name so it is merely an internal transfer. There is no charge. If the RMD is $20,000 and they have 300 shares of a stock that is valued at $50 on the day of the distribution, then the balance of the RMD ($5,000) would be transferred in cash on a day after the shares have been transferred and valued. We estimate the number of shares that need to be distributed prior to transferring them so that we do not move more than necessary. The value of the shares is included with the cash on the 1099R.

[John G]

MCD,

I commend you on providing service for you clients, it is getting more rare every day. And at no charge in this case! Sure it is just a journal, but I know lots of custodians would look at an in-kind request as either a "fee opportunity" or a customer nuisance they would like to ignor. There are a lot of firms that put IRA actions in a que that can take many weeks. We saw this frequently with conversion requests.

Perhaps you should identify your firm, you might get some business.