Should Your Required Minimum Distribution Be in Cash?

If you have a traditional IRA, the Internal Revenue Service (IRS) isn't going to let you leave it untouched forever. Once you reach age 72, you fall under the required minimum distribution (RMD) rules. These require you to take a certain amount from your traditional IRA, profit-sharing plans, 401(k)s, 403(b)s, 457(b)s, SEPs, and a few other less-common retirement plans. It does not apply to Roth IRAs while the owner is still living.

The amount of the distribution depends on a number of factors, but for now, let's focus on how you should take it. What is the most tax-efficient way? We asked some financial advisors to weigh in.

Key Takeaways

  • It's usually easiest to take your required minimum distribution (RMD) in cash since there is no tax advantage. You can take just the dollar amount you need to, which you can't necessarily do otherwise.
  • For clients that don't need their RMD to live off and wish to lower their taxes, a qualified charitable distribution (QCD) is an option. 
  • Taking two RMDs in the same year can generate higher taxes and impact Social Security income. 

Cash or Stock?

Should you take your RMD by getting the cash or transferring the stock to another account? According to Michael J. Garry, managing member and chief compliance officer at Yardley Wealth Management, it doesn't matter for tax purposes. "There is usually little, if any, tax efficiency added by taking in-kind distributions instead of cash. Whatever comes out is taxed when distributed, and there are no embedded gains on either the cash or in-kind distribution."

He continues, "Because there is no advantage, it's usually easiest to just take cash. The advantage is that you can take exactly the amount you need to, which isn't always possible if you take an in-kind distribution of stock or a mutual fund."

He offers two exceptions, though: "First, if you don't have any cash in your IRA and either it is a depressed stock market, or a favored long-term holding of yours is depressed, it might be better to take an in-kind distribution rather than sell something at a depressed price. It won't help with taxes, but it might be the better investment decision."

"The other exception," he says, "is if you hold highly appreciated company stock in a company retirement plan and you want to use the net unrealized appreciation (NUA) rules. Then you'd take the stock out, pay taxes on the cost basis at ordinary income tax rates, and pay long-term capital gains rates on the rest of the appreciation (whether you sell immediately or in the future)."

Give It to Charity

If you have to take it, you might want to donate it. Wayne Bland, a financial advisor and retirement plan consultant with the Charlotte, N.C.-based Metro Retirement Plan Advisors, says, "For clients who don’t need their RMD to live off and wish to lower their taxes, I would consider a qualified charitable distribution (QCD). QCDs automatically satisfy required minimum distributions in the year the QCD is made. The IRS permits annual direct transfers to a qualified charity up to $100,000 of tax-deferred IRA savings."

Wait Until April 1?

Michael Tove, Ph.D., president and founder of AIN Services in Cary, N.C., says, "The law permits someone who is starting RMDs the first time (having reached age 72) to defer taking their first RMD until April 1 of the following year." But he goes on to say that it's probably not the best idea to wait because the person will have to take two RMDs in the same year, which could possibly generate higher taxes and have an impact on Social Security income. 

He also provides another example: "Let's assume a taxpayer who is 72 on (or before) Dec. 31 of the current year has an IRA worth $100,000. The RMD will be $3,650. For purposes of this illustration, assume the IRA account neither grows nor falls other than the removal of the RMD itself. If the $3,650 RMD is taken by or before Dec. 31, the account value at the close of Dec. 31 is $96,350. The RMD for the next year will be $3,636. However, if the first RMD of $3,650 is taken anytime from Jan. 2 through April 1, the RMD due for that second year is based on $100,000 and would be $3,774."

He continues, "Taking the first RMD after Dec. 31, though permitted by law, results in the second RMD being unnecessarily increased by $138. That may not be a lot in the grand scheme of things, but money is money. And the total amount of distribution reported in the second year just jumped from $3,774 to $7,286. Finally, considering the average IRA in this country is closer to $300,000, each of those bites just tripled in size."

The Bottom Line

All of the advisors we asked agreed that aside from using the QCD, there's little you can do to avoid paying taxes. Tove says, "There's no such thing as a most efficient tax way to take RMDs. The distribution is reported annually on Form 1040 as taxable income. Whether it is taken monthly, quarterly, or annually makes no difference."

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Internal Revenue Service. "Retirement Topics — Required Minimum Distributions (RMDs)."

  2. Internal Revenue Service. "IRS Reminds Retirees of April 1 Deadline to Take Required Retirement Plan Distributions."

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.