Take-Away: With the currently depressed market, an individual who is faced with taking required minimum distributions (RMD) in 2022 should consider taking the RMD in-kind, rather than liquidating their investments and taking cash to satisfy the RMD obligation.

Background: Required minimum distributions (RMDs) are not negotiable once the retirement account owner attains the age 72. However, those individual account owners do have the opportunity to improve their portfolios at the same time. The IRS requires the account owner to take the proper amount from their RMD-subject retirement accounts by year-end, but the rules do not specify which investments that must be used to meet the RMD obligation. While some times specific investments can be  liquidated to create the cash to meet the RMD obligation, that portfolio ‘rebalancing opportunity’ probably will not be all that appealing in a ‘down’ market, nor will the account owner want to disrupt his/her IRA holdings while they are ‘down.’

In-Kind Distributions: Admittedly, an in-kind distribution of investments will not help reduce the retirement account owner’s income tax bill for 2022, since that tax liability is already established since the RMD is determined using the December 31, 2021 account balance. However, if the account owner does not need the RMD for living expenses (a big assumption these days with rampant inflation) a transfer in-kind of securities from a retirement account like an IRA to a taxable brokerage account may make sense. Not only can an in-kind distribution of securities  help to maintain the same market exposure, just in a different part of the account owner’s portfolio, but the in-kind transfer may also reduce taxes due on the future appreciation when the securities are eventually sold.

  • 2022: RMDs taken in 2022 can expect to be higher, since the presumably higher retirement account balance on December 31, 2021 is used to determine the 2022 RMD. Thus, the RMD amount cannot be finessed by timing when to take the RMD in the ‘down’ next calendar year. This unfortunately means that most portfolio balances were at least somewhat higher back on 12/31/21, which means the account owner may have a high RMD-related tax bill in 2022 even though their retirement investments have abruptly shrunk during  the first half of 2022.
  • QCD: The only real way to reduce the RMD-related taxes is to use a qualified charitable distribution (QCD) from a traditional IRA, up to $100,000, which is not subject to taxation. But not everyone is charitably inclined and will not consider a QCD as a way to avoid paying income taxes.
  • No Immediate Tax Benefit, But…: Since timing is not an option to reduce the income tax burden when taking an RMD in 2022, consider taking the distribution ‘in-kind’ rather than liquidating depressed securities from the IRA in order to meet the RMD obligation for 2022. An in-kind distribution means that the account owner receives the actual securities rather than cash, and moves those securities into their taxable brokerage account. As noted, there is no RMD-related tax benefit to taking an in-kind RMD, but by moving the securities in-kind from the retirement account, and using non-IRA assets to pay the taxes that are due on the RMD, there will be no slippage in terms of portfolio performance. In short, taking an in-kind RMD can help the retirement account owner to meet their RMD obligation while simultaneously  maintaining exposure to the depressed security or market segment.
  • Potential Tax Benefit: There could be a future tax benefit to taking an in-kind RMD, if the security later comes back in value and it is later sold from the account owner’s taxable account. That is because when the securities are moved to a taxable brokerage account, any appreciation beyond today’s relatively low, potential prices will be taxed at the capital gains rate rather than ordinary income tax rate. In other words, the account owner may have moved the securities out of the retirement account with a relatively low tax bill attached to them.


Example: Fred, age 75, is in the 32% marginal federal income tax bracket in 2022. Fred takes an in-kind RMD of a stock position worth $50,000 to fulfill his RMD obligation for 2022. Fred would own $16,000 in taxes on this distribution, ideally paying the income taxes with his separate assets. If the in-kind distributed stock later appreciates to $80,000 over the next 3 years, and Fred decides to sell the securities, his tax bill would be $4,500 (his $30,000 in appreciation multiplied by the 15% capital gain rate.) By contrast, had Fred opted to hang on to the depressed stock within his IRA and he took a distribution of $50,000 cash from a money market fund instead, Fred’s tax bill on the RMD would be the same,  $16,000, but if Fred were to eventually sell the once-depressed stock from the IRA at a market value of $80,000, Fred’s tax bill on that distribution would be $25,600.

Conclusion: In-kind distributions can help to meet two key goals. They help the account owner to maintain consistent exposure to a depressed security, and they potentially reduce the taxes that would be due upon the security position’s eventual sale. An in-kind distribution can thus be a helpful way to take advantage of current market weaknesses while improving the account owner’s future bottom line from a tax perspective.