15 Feb I’m confused about in-kind IRA penalties. Help!

Q. In your story about taking required minimum distributions (RMD) “in-kind,” you said a penalty can apply if you don’t take out enough. If you’re doing an RMD, you’re telling the financial institution the value to take and that won’t change, whether the price of the stock subsequently goes up or down. So how would the penalty work if the prices change? I’m confused.
— Still working

A. We took your question back to Deva Panambur, a fee-only planner with Sarsi, LLC in West New York, who answered the original inquiry.

Let’s review what he said then: “When an RMD is taken in-kind, you pay ordinary taxes on the value of the asset — stocks, mutual funds, etc. You don’t pay capital gains taxes for the sale of the stock inside your IRA.”

If you take your RMD in-kind, the basis is re-set to the new value of the stock when the RMD is taken, Panambur said. The holding period also re-sets to the time the RMD is taken.

“So from a tax point of view, taking the RMD in-kind would be the same as selling the stock in your IRA, taking the RMD in cash and then buying back the stock in your regular taxable account,” he said.

He also said, spurring your question, that the advantage of taking the RMD in kind is that it keeps you invested in the market and you minimize the risk that the price of the stock moves against you by the time you transfer the stock out of your IRA account, he said.

“On the other hand, you also run the risk that if you take the RMD in-kind, the changing stock price could result in an insufficient RMD,” he said. “The IRS may levy a penalty of 50% on insufficient withdrawals.”

To your specific question, Panambur said the penalty would apply to the amount less than RMD that is withdrawn.

“Mutual funds are valued once a day at the end of the day and sometimes there is a delay between when a withdrawal request is made and the custodian executes the withdrawal and in these cases there is a risk of withdrawing amounts lower than RMD that one has to be aware of,” he said.

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This story was originally published on Feb. 15, 2023.

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