Is it a taxable event when you transfer stock from IRA to taxable account via “In kind distribution”?

Submitted by Lillian Shao on Wed, 2020-12-02 22:24

Is it a taxable event when you transfer stock from IRA to a regular (non-IRA) account via “In kind distribution”? My brokerage firm said that as you did not sell the stock, it is a non-taxable event. You pay tax until you sell the stock. In that case, the cost basis will be carry forwarded from the original cost basis, so you will pay the ordinary income tax as well as the capital gain tax when you sell the stock. Is it correct?

When you originally contributed $100 to IRA account, you did not pay the tax on that $100, later this $100 grows to $10000, $9900 supposed to be the capital gain tax, but you have to pay $10000 as ordinary income tax plus any capital gain tax when you eventually sell the stock, is it correct?



Submitted by Alan - IRA critic on Wed, 2020-12-02 22:43

  • The first paragraph is a classic case showing why a person should not get tax advice from a broker. An IRA distribution is reported on Form 1099R showing the value of the asset distributed, whether cash or a security. Tax is due on that entire distribution unless the IRA contains basis from non deductible contributions. Most IRAs have no basis, therefore the entire value of a security on the date of distribution will be taxable, and at ordinary income rates, because all gains in an IRA are treated as ordinary income, not cap gains.
  • After distribution of a security (known as an “in kind distribution”, the value of the security at the time of distribution becomes the cost basis in the taxable brokerage account. The holding period also starts on the day after the date of distribution. If those shares are sold in the first year, any value in excess of the value upon distribution will be taxable as a short term gain. If sold over a year later, any gain will be a long term cap gain.  The tax on the distribution includes the value distributed, and any later cap gain or loss is based only on the change in value after the distribution from the IRA. There is no double tax, but gains within the IRA will be taxed at full ordinary rates upon distribution, whereas growth outside the IRA may qualify for the lower LT cap gain rate.
  • Many people take their RMDs and other distribution in kind. This eliminates the need to sell within the IRA and repurchase in the taxable account, although commissions have dropped so much, this is not much of a saving anymore. An IRA owner cannot control the exact value upon distribution since the value is determined when the IRA custodian actually processes the distribution, and the share price might well have changed somewhat between the time the distribution was actually done and when it was processed.

 

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