How to take IRA distribution for MRD

[curiousgeorge]

Thank you for kind help!

How to take IRA distribution for MRD - #1 or #2?

1. Withdraw cash from the account?
2. Or- benefit from a good stock in the account that has grown 233% from price appreciation and dividend reinvestments?
a. Transfer half position to non-IRA account
b. Keep other half position in IRA for continued growth. Dividend yield on original cost is 4.2% (yield on current price is 2%)

Does #2 make sense?
Also, is there a tax benefit here because any cap gain in subsequent long-term sale (which will be on current price as cost basis) will be taxed on lower cap gains tax rate? (Can also ‘benefit’ from a tax loss if need be.)

[mwcpa]

"Does #2 make sense? "

What is your RMD?

Whatever is removed from the IRA will be taxed as ordinary income, there is no special treatment for capital gains or dividends.

When you "reacquire" the stock in a taxable account your basis will be at the rate you purchased the shares.

Example.

IRA is worth 110,000.  It is comprised of cash of 10,000 and stocks worth 100,000 (with a cost basis of 40,000, including dividend reinvestments).

My RMD is 5,000 (merely for example purposes).  I am over 70 1/2 years old.

I ask my broker, who is accommodating, to transfer 5,000 of stock in my IRA to my taxable account to meet the RMD.

My taxable income is 5,000, treated as ordinary income.

My basis is 5,000 in the stock transferred to my taxable account.

[curiousgeorge]

Thanks soooo much MW.

Your use of examples are always great! Understood - IRA distributions, including dividends, are taxed as ordinary income.

There is enough cash in the account to fulfill the RMD. 
Just that the funds in the account may not last beyond 5 years. If there is a market downturn, may not be enough time to recover any losses . Worse, a need may arise to have to sell stock at a loss.

Which is why instead of just withdrawing the cash, may be prudent to transfer stock from the IRA account to a non-IRA account -to kind of protect the 233% gains by locking-in the current high stock prices.

Would not such a transfer be more tax effective for any subsequent stock gains or losses?

Thanks again... and have a wonderful day.

[mwcpa]

why not sell the asset in the IRA, convert it to cash or diversify holdings...

selling the asset "inside" the IRA does not create a tax problem, the gain is not taxed as long as the asset remains within the IRA... you would reap the benefits (in value) of the unrealized appreciation and can covert it to a different that may not be as subject to market fluctuations.

A transfer of the stock to your personal account from an IRA is a taxable transaction as the value of the stock.

Example.

You hold 100 shares of XYZ that you paid $1,000 for in an IRA.  Today it is worth $2,333.

If you transferred the 100 shares from your IRA to your personal account you have taxable income of $2,333.  This is ordinary income and can be taxed as high as 39.6% and if you are under 59 1/2 subject to a 10% penalty as well.

That is not tax efficient, especially if you do not need the 2,333 or your RMD is less than 2,333.

[curiousgeorge]

Thank you MW!

I think I got it!
Reviewed figures, little brain got more confused. Please please tell me if this makes sense.

750 shares bought in IRA for $15,733, now 822 shares worth $36,631
(Company is a stable, dividend aristocrat for many years.)

Transfer 411 shares, in-kind, worth $18,294, to personal account.
$18,294, taxed as ordinary income fulfills the RMD.

If sold after a year with no price appreciation:
  Original 411 shares, cost basis $18,294
  Capital gains: $173 Dividends (4.2% on original cost) + $178 (4 shares, reinvested divs)
  Capital gains tax on $315.

Remaining 411 shares in IRA, continue to grow with dividend reinvestment.

Trying to accomplish 2 things: Take some gains to fulfill RMD, while keeping the stock

Please tell me – does the approach make sense?this make sense?

THANK YOU!!!!!!!!

[mwcpa]

Your cost basis in the shares removed from the Ira and deposited in your personal account have a cost basis equal to the amount reported as income.  So the 411 shares have a cost equal to the 18,294 figure.  Prior reinvested dividends and appreciation have no bearing.  If you sold those shares for anything more than 18,294 you would have a capital gain, short term if those shares were sold in under one year from the transfer.

example.
transfer happens today.  I report Ira income of 18,294.  On jan 2 I sell them all (just the shares transferred to my personal account) for 20,294. I have a short term gain of 2,000.

if there were future reinvested dividends etc on the shares outside of the Ira the cost basis would increase by those dollars.  

Example
transfer happens today.  I report Ira income of 18,294.  I hold these shares and reinvest dividends etc totaling 206.  My cost basis is now 18,500.  Holding period tags to each purchase, so a dividend reinvestment sold in under one year leads to a short term gain or loss.

[curiousgeorge]

Thanks again MW!  

The transfer sounds great.  The value of the shares are "protected" from ordinary income tax. And any increase to basis on reinvested dividends will only be taxed as capital gains.

Have a wonderful week!