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Recent economic conditions have hit many equities hard. Their lowered values have lowered the value of the IRA they're in. Since this year's MRD is based on possibly a higher IRA value at the end of last year, you may pay income tax an irritatingly large MRD.
Equities - such as stocks - you bought in your IRA have a 'zero' tax basis. Whatever amount you take out of your IRA for your IRA distributions is taxed at ordinary income tax rates. And that includes all gains those equities may have made over the years. Also, there's no deduction for any loss within an IRA that your equities may have suffered either.
Keeping those depressed equities in your IRA for a possible comeback within a year or two will have you paying ordinary income tax rates when you take them out in the future for both their value and any gains they make. That's a bad tax consequence for appreciating equities in IRAs.
-Take an In Kind IRA distribution for reduced taxation:
But if (1) you expect those equities to appreciate significantly, (2) you have to withdraw your MRD anyway, and (3) you don't need the cash for living, you can capitalize on that future growth at a much lower capital gains tax rate if you could pull them out now from your IRA. You do this by taking an 'in kind' IRA distribution.
Take an 'in kind' IRA distribution by requesting your IRA account holder to transfer the stock directly from your IRA account to a regular (nonIRA) account without cashing them in. Keep a record on the market value of that stock when it's transferred out. It's that value that you'll have to pay ordinary income tax on as an IRA distribution. You'll have to come up with cash elsewhere to pay this tax.
But that stock value - which you paid income tax on for taking it out of your IRA - now becomes the new basis of that transferred stock. If the stock then appreciates, three better tax consequences will then occur for you:
* Any gain will be subject to the low long term capital gains tax - and that's for the gain above its new basis.
* You'll not have to pay any tax on any gain until you wish to sell that stock, and
* Dividends will be tax yearly - but if they're qualified dividends, you pay little or no tax for them.
Lastly, if the equities fall further and you decide their not worth holding for the future, you'll be able to sell them and take a capital loss deduction, since their selling price will be less than that new basis. And that loss you can use to offset other tax on other income or IRA distributions.
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