RMD, in-kind distribution

[emmetttrudy]

An advisor would like her client (a participant in a 401k plan) to take his 2014 RMD as an in-kind distribution of shares of a certain stock. Is this allowable? I know the RMD is a taxable event. Regardless of whether tax is withheld from the distribution or not the 1099-R will show the entire amount as taxable. But is it ok to transfer stocks in-kind from a 401k plan to another account (trust)?

[ETA Consulting LLC]

Sure. There are no rules that preclude it; as long as the document doesn't contain language to disallowing it.

Good Luck!

[emmetttrudy]

ok, thanks. the document does allow for in-kind distributions.

[My 2 cents]

Anything to prevent the plan paying the participant in cash and the participant then using the proceeds to buy the stock as a personal investment? Wouldn't paying the stock out in kind require a proper current valuation of the stock, to make sure that the participant is paid no more and no less than what he or she is entitled to under the plan? It could be really messy if the stock is closely held. There is also a question as to whether the transaction could adversely affect the plan or other participants (presuming that there are other participants - not at all sure what rules apply if there are no others). Unless the plan's assets consist entirely of shares of that stock (which would look shaky with respect to the fiduciary duty to diversify investments - this was identified as a 401(k) plan, not an ESOP), the participant would be given a disproportionate share of the plan's holdings of that stock if the RMD were paid out entirely in stock shares.

[emmetttrudy]

These are just shares of a popular stock (non-employer) held in his own personal brokerage account, so I don't think it would have any affect on any other participant's in the plan.

As for the valuation, my assumption is they would pay him out enough stock to at least cover the RMD, and depending on the price of the stock, if it's not possible to get the exact amount of the RMD, he would be paid out something slightly more (ok since he is currently eligible for an in-service distribution anyway).

[My 2 cents]

Not a tax expert,and just trying to understand how this would work, but if the stock was purchased at $20 per share using money in his 401(k) account, the stock is now $45 per share and he ultimately sold at $60 per share, assuming that the RMD payout is supposed to be 2,000 shares (current value $90,000), wouldn't the following all be true?

• Ordinary taxable income of $90,000 this year, with none of it eligible for capital gains treatment or any other special treatment
• Tax basis of shares becomes $90,000, never mind that they were purchased in the 401(k) for $40,000
• When he sells for $120,000, $30,000 is taxable as realized capital gains

How does that differ from the plan selling the shares, giving him $90,000 in cash, and he uses that to buy 2,000 shares of the stock? Why is there any advantage to doing it as in-kind, especially if it is a readily available popular stock?

Is it not also true that even if the plan permits the maintenance of participant-directed brokerage accounts, it is not "his" brokerage account while it is held under the plan?

[TPAMan]

"in-kind" distributions simply eliminates market risk. To sell, transfer funds and rebuy a stock typically takes several days. The price of the stock will change during the time you are out of the market. Transferring 'in-kind' removes the risk of missing out of gains (and/or losses.) Usually not a big deal, but in a volatile market, could be quite significant.

[ESOP Guy]

Not selling also save brokerage fees. Not as meaningful in the days of $10 trades vs when it was 1% or 2% of the purchase price.

But the advantages seem small to me but the idea also seems harmless enough also.

[emmetttrudy]

I dont think there really is an advantage other than like the others have pointed out saving on possible transaction fees and market flucation for a day or two. But the participant wants to do it that way. We're not in a position to convince him one way or the other. The plan allows for it, he is choosing to do it this way for his (well, presumably his advisor's) reasons.

As for your second point, technically yes, the "Plan" owns the account. But I'm not sure why an individual taking a distribution of non-employer stock from his individually directed FBO account would affect the Plan or other participants (positively or negatively), whom all have their own individual accounts.