The ABCs of Taking RMDs From Your IRA

Q: Do required minimum distributions from an IRA have to be in cash? Or can I transfer a stock valued for that amount on that day to a taxable account — and therefore not have to sell desirable stocks in my IRA? — Max

A: Uncle Sam offers all kinds of incentives to save during your working years, but once you reach 70 ½ you’re required to make a required minimum distribution (RMD) from your traditional IRA or other tax-deferred accounts.

Sadly, you can’t put off paying taxes indefinitely.

Fail to take your RMD and you’ll owe a whopping 50% penalty — plus regular income tax — on the amount you’re supposed to withdraw. This amount is based on an IRS worksheet and varies by age.

Roth IRAs generally aren’t subject to these minimum distributions since you paid the IRS its share before you made the contributions.

There’s no getting around RMD's – or paying income tax on IRA withdrawals – but there are ways to make it a little less onerous, says Leslie Thompson, a certified public accountant, chartered financial analyst, and managing principal at Spectrum Management Group in Indianapolis.

One strategy is the one you indicated in your question.

Rather than cash out, pay taxes, and reinvest the remainder in a taxable account, you can transfer investments (including stocks, bonds, mutual funds, etc.) from your IRA to a taxable account. “You’re still going to have to pay the tax,” says Thompson. “But this simplifies having to liquidate, transfer and repurchase the asset.”

This approach works best if you want to keep your portfolio intact and reduce the time out of the market. In doing so, says Thompson, you may also save on transaction fees. Note: Going forward, your tax basis will be based on the value of the securities after you make the switch.

If you have multiple IRA accounts, your RMD calculation is based on the total value of your IRAs, but you can take all of your distributions from a single account. One strategy is to focus on transferring funds out of accounts with the highest cost structures.

Transferring from an IRA to a taxable account is generally easy if you do so within the same brokerage, but it’s also possible to transfer from one firm to another via the Automated Customer Account Transfer Service (ACATS).

Thompson recommends calculating the amount you need to transfer based on the most recent asset valuations, and then checking the amount after the transaction goes through. If you come up short you can simply make of the difference with a traditional distribution.

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