RMD In-Kind IRA Distribution & Taxes
My client just visited the IRS office and they told him he could do the following which I never heard of and need some other opinions. He holds 3 investments in his IRA that are at huge losses, Cost Basis $75,000, Value $15,000. His RMD is $75,000. They told him that he could move these investments out in-kind to a non-IRA account and although the market value is only $15,000, he could count this to meet his RMD requirement of $75,000 if he pays the taxes on the $75,000. Is this true and how does he pay the taxes since the 1099-R will show a distribution of $15.000. Thanks.
Permalink Submitted by mk foss on Wed, 2010-10-20 17:00
So all three of these investments have lost value since 12/31/09? I wonder if the 12/31/09 values were overstated causing such a large RMD.
You can’t satisfy the RMD by “paying tax” on an amount greater than the distribution reported on the 1099-R.
If the custodian reported the cost rather than the actual FMV on Form 5498 – you could see why the disparity has occurred. If the 12/31/09 value was determined incorrectly, would the 1099R show the actutal FMV?
I’m sorry but I have more questions than answers.
Permalink Submitted by Don Morris on Wed, 2010-10-20 19:47
The client had Lehman Bonds that he paid $75,000 for several years ago. This is a large IRA so the $75,000 RMD is due to the entire IRA account balance on 12/31/09 and not just the Lehman bond value. The local IRS office said he could move the Lehman bond out in-kind (current value $5,000) but pay the taxes on the $75,000 RMD since that is what was paid for the bond. As you stated, the 1099-R will show a distribution on $5,000 so I don’t know how the client will pay taxes on $70,000 that was not distributed and does not show on the 1099-R. The IRS office says he can do that somehow. I hope that clarifies the situation.
Permalink Submitted by Alan Spross on Wed, 2010-10-20 23:48
There has been an obvious miscommunication between your client and the IRS Rep. He can take the in kind distribution, but if the current fair market value of the bond is only 5k, only 5k will be reported on his 1099R and he will only be credited with that amount toward his RMD. There is no option to voluntarily overpay taxes to get RMD credit, and if there was I don’t see any advantage in doing it.
Hard to figure what the IRS might have been thinking. Almost sounds like the Rep was getting NUA in a qualified plan confused with a loss situation, and then tried to apply it to an IRA. Makes no sense. Of course, the client may just have totally misunderstood and that’s probably more likely.