03 Mar Do I have to sell securities before taking money from IRA?

Q. The new SECURE Act requires that inherited IRAs must be distributed within 10 years of inheritance. My question has to do with IRAs that hold securities. Do the IRA securities have to be sold in order to comply with the 10-year distribution requirement?
— Planning

A. The SECURE Act changed several rules about IRAs.

Among them is that inherited IRAs can no longer be stretched over a beneficiary’s lifetime.

Instead, as you noted, inherited IRAs must be emptied in 10 years. Only surviving spouses are exempt from the 10-year withdrawal rule.

To your question directly, you do not have to sell the securities within an IRA when you take out distributions, said Bill Connington of Connington Wealth Management in Paramus.

But, he said, there is little to no tax efficiency added by taking so-called in-kind distributions, which means taking out the actual securities from the IRA. That’s because Required Minimum Distributions (RMDs) are considered ordinary income from a tax perspective, he said.

“Cash is always easier as you can take the exact amount that you need and have taxes withheld easier,” Connington said. “With an in-kind distribution, make sure you have cash on hand to handle the tax withholdings.”

Some investors may prefer to take an in-kind distribution over cash if the underlying securities have been performing well, he said.

“Either way is fine but most investors have found that taking cash to be an easier process,” he said.

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This story was originally published on March 3, 2020.

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