Three Savvy Stock Market Strategies Upon Taking RMDs from IRAs with Gains

(Scroll down or click here to watch the video on "Taking IRA RMDs In-Kind")

February 01, 2021

Now that required minimum distributions from retirement accounts are back for 2021 after being waived in 2020, you should look before you leap if you’ll owe RMDs this year. I’ll outline three strategies commonly overlooked by many retirement advisors that are good for you to at least know about especially if you own a large IRA subject to RMDs. Note that these strategies apply not only to most account owners who are 72 or older in 2021 but also to retirement account beneficiaries subject to RMDs.

One tactic that we mentioned in our last article was the benefit of using stock market gains in 2020 to fund 2021 RMDs early in the year, in full or in part. In this Large IRA Tips blog, we’ll take that possibility one step further: you might do very well by making such equity-sourced RMDs “in-kind”, rather than in cash.

Three savvy strategies commonly overlooked by financial advisors upon taking RMDs from IRAs with gains

Strategy 1: Rebalancing When Acting On Your RMDs

Many retirement advisors overlook the importance of recommending to sell from profit positions instead of the loss positions, which occurs by default when selling proportionately across all positions. This often applies by default when taking RMDs. But taking RMDs from gains can also help to rebalance your stock and bond risk exposure, while selling at a profit, instead of at a loss.

To show the advantage of such a plan, let’s take a hypothetical retirement investor, Carol Bell, whose $1 million IRA makes up a large portion of her retirement investment assets. Carol prefers a 50-50 asset allocation, stocks to bonds, so at the start of 2020 her IRA held $500,000 in bond funds as well as $500,000 in stocks and stock funds. Thanks to a 20% gain in stocks last year, in line with the broad market average, Carol ended 2020 with $600,000 in stocks while her bonds were still worth $500,000.

For Carol, age 76, her RMD this year from her now-$1.1 million IRA is $50,000. She withdraws $50,000 in January from the stocks and stock funds in her IRA, satisfying her entire 2021 RMD. Why would Carol do this?

In essence, Carol is taking gains—selling high. As renowned money Peter Lynch once said, “You never lose money by taking a profit.” Here, Carol will be satisfying her RMD obligation by using IRA money she didn’t have a year ago.

After moving $50,000 from equities via her RMD, Carol will be left with $550,000 in stocks and $500,000 in bonds: she’s rebalancing her portfolio closer to her desired 50-50 asset allocation. Carol still has equities to provide ongoing gains if the market moves higher, but she has also reduced her exposure to a possible stock market correction during 2021.

Strategy 2: Taking RMDs from Gains

As mentioned, RMDs might be made in-kind rather than in cash, after a stock sale. To see how this might work in the real world, we recently spoke to a client we’ll call Al, who would owe about $20,000 in RMDs for 2021. Reviewing his portfolio, which includes stock market index ETFs and individual stocks, we noticed that one of his stocks had increased significantly during 2020: the gain for the year was much greater than his $20,000 RMD. Thus, I shared the idea of selling some shares of that stock within the IRA, as the year begins, then withdraw the sales proceeds to cover his RMD, partially or in full.

Al knew that the stock had gained value, but he was surprised by the amount of the appreciation. Therefore, he was receptive to selling some shares in January and distributing the sales proceeds.

Of course, I pointed out this stock could continue to climb, so selling shares now could limit future gains. Then I mentioned some other considerations about potential price movement.

Next, I told Al that if the price of this stock declined, he could then buy more shares at a cheaper price. Alternatively, if the shares did continue to climb, Al might have more gains in 2021 and we could consider this RMD approach again next year.

Strategy 3: Taking RMDs as an “In-Kind” Transfer

In addition, I posed the idea of taking the RMD with an in-kind transfer, so Al wouldn’t have to sell any shares! For example, he could move shares of this stock worth $20,000 from his IRA to a taxable account to satisfy $20,000 of RMDs without selling any shares and thus still owning the stock instead of dumping it. Al would report $20,000 of taxable income, just as he would by withdrawing $20,000 in cash from his IRA.

I explain taking IRA RMDs "In-Kind" in the video below:

Additional Potential Tax Benefits of Taking Your IRAs’ RMDs “In-Kind” from Gains

This approach would not only allow Al to participate in any future potential gain but also provide him with a cost basis for the transferred shares: their value on the date of the distribution, or $20,000 in this example. Subsequently, Al might either sell those shares with a cost basis to reduce the tax in future gains or take a capital loss if the shares retreat after the transfer.

Suppose Al transfers $20,000 of ABC Corp. shares from his IRA to a taxable account to satisfy his RMD. If ABC shares decline in value and Al sells them all for, say, $17,000, with his $20,000 cost basis he would have a $3,000 capital loss to report on his tax return: that loss could reduce the tax he owes for the year, even if the $17,000 sale price was less than the amount he first paid for the shares in his IRA.

Moreover, if Al’s $20,000 of shares rise to sell at, say $21,000, he would report only a $1,000 gain on the sale. If the shares were held at least one year in the taxable account, that hypothetical gain could qualify for favorable long-term capital gain tax rates.

Many brokerage firms accept in-kind transfers of securities. If you decide the idea appeals to you, notify your IRA custodian that you’d like to transfer a given number of shares into a taxable account. As long as you won’t need the cash from your RMD this year, this plan allows you to meet your RMD, effectively take gains, and hold onto equities you prefer to retain.

You can also read more about this here, in Kiplinger's RMD Strategy No. 7 of 12: Transfer In-Kind article, or at Investopedia on the same topic in the article titled, Should Your Required Minimum Distribution Be In Cash.

Stepping Up The IRA Advice from Your Retirement Advisor

It is important to be sure that your financial advisor recognizes that assets inside of IRAs, 401(k)s, 403(b)s, TSA, and other retirement plans operate by a completely different set of rules than any other types of assets you may own. Be certain they are thinking outside of the box for you and not merely acting robotically. After all, the best value of what you get from a retirement advisor is for what they know, not what they do. Questioning the status quo and general tendencies beyond what you can do, and instead exploring what you should do based upon how you can uniquely benefit most is their job. It is also a great way to determine if you are getting value beyond just investment advice. If you aren’t hearing about strategies like this, you may just be working with a general financial practitioner providing merely investment advice. Because when it comes to your retirement, there is so much more to know. For this reason, you may want to be certain you are working with a retirement specialist, not just an investment advisor. In retirement, it is even more important to consider how you take money out of your IRAs in the most tax-favorable manner and keep more of what you make, than simply monitoring investment performance. This becomes exponentially more important if you own a large IRA and if you are in a higher tax bracket. If you aren’t working with a specialist and want a second opinion on the advice you are receiving from your financial or so-called retirement advisor, we can go over your specific situation and suggest a customized RMD schedule for you to request from your IRA custodian.

By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors

This content is developed from sources believed to be providing accurate information, and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.