“In-kind” Required Minimum Distributions (RMD) from Your Retirement Account
Once you turn 70 1/2, IRS rules require you to begin to make what are called Required Minimum Distributions (RMD). RMDs are required to be disbursed to the custodian regardless of whether the holder immediately needs the funds or not. Minimum distributions are a requirement for Traditional IRAs, Simple IRAs, SEP IRAs, Roth IRAs and any combination of the four. If you have multiple retirement accounts, the RMD must be calculated for each individual account, but total required amount can be taken from any single account as long as the amount disbursed meets the sum of the individuals RMDs.
The biggest boon here is that if you have three separate retirement accounts, each making three separate and different annual returns, you could calculate the total RMD from all three, but choose to take disbursements from the account with the lowest annual investment return, saving the higher return investments for the future.
Let’s say you have a traditional IRA invested mostly in indexed mutual funds which has returned around 7% for the last three years and a Real Estate IRA, returning 9% annually over the same time period. Your RMD will be calculated from the monies in both accounts, but you can make the disbursement from the traditional IRA, saving the principal from the 2% additional return intact in its entirety.
Similarly, RMDs can be taken as in-kind distributions. In other words, you are able to take non-liquid asset disbursements from your IRA without being required to completely liquidate said assets prior to the disbursement. For instance, if you hold real estate or mutual funds in your IRA, you are free to disburse them without having to liquidate prior to disbursement. This saves money on potential losses which could be incurred as well as any required trade commissions required to be paid for liquidating the asset. There are a couple of rules for such a disbursement. So, if you feel a stock is undervalued, you can still disburse it to yourself without taking a loss and make back any gains that could potentially occur after the disbursement.
First, exact values for the disbursed assets will need to be calculated at current fair market rates. In some cases, there needs to be official valuation to substantiate and corroborate the amount taken as a distribution.
Finally, you need to be careful disbursements take place by 12/31 each year as not doing so will require a 50% tax + normal income tax rates on the amount which should have been disbursed (as long as your account is not a Roth).
Understanding the inner-workings of in-kind distributions is two parts: one part IRA and one part tax. Speaking with both a IRA tax specialist and an investment planner is helpful to determine the proper strategy, but in many instances simple math and an eye on the future is helpful in determining an overarching strategy.