We are all faced with the dilemma of taking Required Minimum Distribution from our IRA accounts when we turn 70 years old. If you have accumulated large IRA’s (including transferred 401K accounts), this can be a problem:
- You may not need the approx. 4% annual amount
- The RMD when added to your pension and Social Security might put you in a much higher tax bracket, Social Security might be taxed at a higher rate
- You have to pay income tax on the RMD as “ordinary income”, not getting any preferred tax rate break
There are a few ways to help minimize taxes with your RMD. For example, you can use an actual “in kind” stock transfer. This works really well when you have good quality stocks held in your IRA that are currently depressed. Instead of taking the RMD in cash (or selling stocks for cash), just transfer the actual stock “in kind” to your taxable account. You will still pay tax as ordinary income on the RMD stock value, no way around that. However, the appreciation of that stock in your taxable account will be under the Capital Gains tax rate, today 15%.
Here is an example:
A 71-year-old man in the 30% tax bracket takes an in-kind RMD of a stock position worth $50,000 at the time of the distribution. He’d owe $15,000 in taxes on the distribution. His cost basis on that stock in the taxable account would be $50,000. If the stock goes up to say $80,000 in the next three years and he decides to sell, his tax bill would be $4,500–his $30,000 gain multiplied by the 15% capital gains rate.
However, let’s say that same person keeps the depressed stock in the IRA and takes a distribution of $50,000 in cash from the IRA instead. His tax bill on the RMD would be the same–$15,000. But if he were to then sell the same stock 3 years later from the IRA at a market value of $80,000, his tax bill on that distribution would be $24,000.
The tax savings would be substantial, a $19,500 tax savings.