14 Dec Should I use an in-kind transfer for my RMD?

Q. I have some mutual funds in my IRA and I need to take my Required Minimum Distribution (RMD). I like the funds that I’m in, and I’ve been told I can take the RMD in-kind, meaning, I can pay the tax and hold onto the mutual funds, which I like. The mutual funds I want to sell in-kind don’t fluctuate greatly day-by-day. Is there any problem taking the RMD with these mutual funds this way?
— Investor

A. There’s always a lot to consider if you have to sell investments to take your annual Required Minimum Distribution (RMD).

Here’s what you should know.

A fund that has a stable value poses less risk when doing an in-kind mutual fund RMD transfer, said Jeanne Kane, a certified financial planner with OneDigital in Boonton.

“If the value doesn’t fluctuate much from day-to-day, you’ll have less risk that the value will grow, and you’ll take more out of your IRA than the RMD or the value will drop and the RMD won’t be fully taken.”

She noted that it’s important to take out the right amount for the RMD so you don’t take out more, giving yourself a higher tax bill, or a lower amount, which could mean a penalty.

And that’s important for you to consider here.

“A risk in doing an in-kind RMD with mutual funds is that mutual funds are valued daily at the end of the day. You tell the holding institution to transfer a certain number of shares that are the value of your RMD,” she said. “If the mutual fund’s value decreases during the day, the value at the end of the day could be less than your RMD.”

If you take less, you would have to take a second distribution to make sure you took the correct RMD amount, she said.

One way to avoid the issue is to consider an exchange-traded fund that holds similar investments as the mutual fund you like — if you have that option — for your in-kind exchange, she said.

“Exchange-traded funds trade throughout the day so your in-kind transfer request will have a value closer to what transfers,” she said.

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This story was originally published on Dec. 14, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.