What happens to cost basis when you transfer stock from an IRA?

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Q. When you move stock from an IRA account to a regular stock account, not selling the stock but transferring it as an Required Minimum Distribution (RMD), does the cost basis change?
— Investor

A. With the big market downturn, lots of people are concerned about selling stock right now.

Some are considering moving the stock to a taxable account as part of a Required Minimum Distribution (RMS) instead of selling.

When you have an in-kind transfer, your cost basis is reset, said Kenneth Bagner, a certified public accountant with Sobel and Co. in Livingston.

He said if, for example, you had a stock you bought in your IRA for $10,000 and now it is worth $25,000, when you withdraw from your IRA, you will have tax on the full $25,000, assuming you had a traditional tax-deferred IRA.

The basis is reset at the fair market value of the stock on transfer, which is $25,000, Bagner said.

If you sell the stock for $30,000, you will have a $5,000 capital gain, he said.

“The one area you need to be careful of is that the transfer resets your holding period,” Bagner said. “Therefore, in order to have a long-term capital gain, you need to hold the stock for a year.”

Long-term capital gains provide preferential tax rate treatment compared to short-term capital gains, which are taxed at ordinary tax rates based on your marginal tax bracket.

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This story was originally published on Oct. 4, 2022.

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