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Required Minimum Distributions (RMDs) Don’t Have to Be in Cash, But…

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Here’s something that I bet you’ve never run across – when you have to begin taking Required Minimum Distributions (RMDs) from your IRA or Qualified Retirement Plan (QRP), most folks think you must take these distributions in cash.

This is not the case, you can actually take distributions of any sort, not just RMDs, from your plan (IRA or QRP) in either cash or “in kind”. By “in kind”, this means that you can take the actual securities (stocks, bonds, or other investments) from the account. These distributions in kind can be used to satisfy your RMD for the year. There can be both pros and cons to taking distributions in kind.

Pros in favor of in-kind distributions

You might want to consider using an in-kind distribution if your IRA or QRP is fully invested and you want to keep it that way. Sometimes (such as in a market downturn) it can be beneficial to maintain a cash position, but generally it’s often in your best interest to remain fully invested. Using an in-kind distribution will allow you to remain fully invested before and after your distribution.

Another reason that you might want to use an in-kind distribution is if you have a particular position in a stock or limited partnership (for example) that you consider to be undervalued, such that it will appreciate considerably after you’ve distributed it. This would put you in a position to have your gain (beginning with the date of distribution) taxed at capital gains rates rather than ordinary income tax rates.

In this second case you need to understand that you’d be taxed at ordinary income tax rates on the value of the distribution (on the day of the distribution) and your basis in the position will be set at that value. Future gains will be considered against that basis.

In addition, if you don’t have to cash out of a position in order to distribute it, you wouldn’t incur a trade commission.  Assuming that you would just re-invest in the same or a similar security, you’d then incur another trade commission when you made the new purchase. So distributing in-kind can cause a double commission to be paid, which may not be necessary.

Cons against in-kind distributions

Sometimes it can be difficult to value a security – for example if it is very thinly-traded. In a situation such as this, distributing the RMD in-kind can cause difficulties, especially if you’re hoping to minimize the distribution to only the required minimum.

With this in mind, in order to reduce confusion and ensure that you’re taking the correct amount in your RMD, it can be prudent to maintain or create a cash holding that will be sufficient for your RMD.


It’s important to keep in mind that no matter how you take your distributions, you’ll have to pay ordinary income tax on the distribution – and the tax may be pro-rata if the IRA is partly non-deductible.

One Comment

  1. Scott says:

    As always, thanks for your ongoing educational material Jim! FWIW, I have been taking this approach for a number of years. An additional; albeit, minor benefit is:

    If you plan to invest in the same asset, you eliminate not only commissions, but SEC fees on the sale, buy/sell spreads and the dead-time risk between sell date/time and when cash is available to make the replacement purchase. If you plan to invest in a similar asset, you can’t avoid the first two, but can limit the last, by conducting the buy/sell transactions first, within the tax-deferred account, as this is allowed prior to funds settlement. You can then move the new asset to the taxable account, once settled.

    I would also note the same process is possible for other asset transfers. You can make “in kind” custodial transfers for ROTH conversions, paying the taxes from another source. You can also do the same from other tax advantaged accounts, assuming the custodian is willing and the asset is not unique to the particular account.

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