What Is an In-Kind Withdrawal & How Does It Work?

An in-kind withdrawal involves directly transferring an asset from an account to an individual, rather than converting it into cash. This allows the recipient to take possession of the asset itself, representing a direct change in ownership from the account to the individual.

Understanding In-Kind Withdrawals

An in-kind withdrawal differs from a cash withdrawal because it involves the physical asset or security instead of liquid funds. When an individual makes an in-kind withdrawal, they receive the actual investment, such as shares of stock, rather than the monetary value of those shares after a sale.

Individuals might choose an in-kind withdrawal for several reasons, including a desire to maintain ownership of a specific asset, such as a favored stock. This approach can help avoid the transaction costs and potential market impact associated with selling assets within the account and then repurchasing them. It also serves purposes like estate planning, allowing for the direct transfer of assets to beneficiaries, or moving an asset to another account outside the current custodian without liquidation.

Common Assets for In-Kind Withdrawal

Many assets can be withdrawn in-kind, especially those easily transferable with a readily ascertainable value. Publicly traded securities are common examples, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). These assets are suitable due to their transferability and the ease of determining their market value.

Less common assets for in-kind withdrawal include real estate, often held within trusts or self-directed retirement accounts, and physical precious metals. Not all assets are eligible, as eligibility depends on the account type and custodian rules. Certain assets, such as annuities or certificates of deposit, cannot be transferred in-kind and may require liquidation.

Valuation and Tax Implications

The value of an in-kind asset for withdrawal is determined by its fair market value (FMV) on the date of distribution. Fair market value is the price an asset would sell for on the open market between a willing buyer and seller, both having reasonable knowledge of facts and acting without compulsion. For publicly traded securities, FMV is the closing price on the distribution date. For less liquid assets like real estate, FMV is established through a professional appraisal or comparative market analysis.

An in-kind withdrawal is a taxable event, similar to a cash withdrawal, even without cash receipt. The asset’s fair market value on the distribution date is included in the recipient’s gross income for tax purposes. For withdrawals from pre-tax retirement accounts, this value is taxed as ordinary income. For non-retirement accounts, it may be treated as a return of principal or capital gain, depending on the asset’s original cost and appreciation.

The recipient’s new cost basis for the asset becomes its fair market value at distribution. This new basis is important for calculating future capital gains or losses if the asset is later sold. For example, if an asset with an original cost of $10,000 is withdrawn in-kind when its FMV is $15,000, the recipient pays tax on the $15,000, and their new basis is $15,000. If they later sell it for $17,000, they owe capital gains tax only on the $2,000 appreciation from the new basis.

In-kind withdrawals can satisfy Required Minimum Distributions (RMDs) from retirement accounts, with the distributed asset’s fair market value counting towards the RMD amount. While this allows individuals to keep the asset, they still owe income tax on its fair market value, potentially requiring other funds to pay the tax liability. State income taxes may also apply, varying by state, and rules can differ between account types.

Executing an In-Kind Withdrawal

Initiating an in-kind withdrawal requires contacting the account custodian, such as a brokerage firm, bank, or trust company, to understand their procedures and requirements. This includes verifying asset eligibility for in-kind transfer and confirming the custodian facilitates such transactions. It is also important to gather accurate asset information, including the number of shares for securities or a legal description for real estate.

The custodian requires a specific valuation date for the asset, often the date of transfer or a recent market close. Inquire about potential transfer fees or administrative charges, which can range from approximately $50 to $250 for securities transfers, and higher for complex assets like real estate. Some firms may charge a flat fee or a percentage of the assets moved.

The process involves submitting a formal request to the custodian, by completing specific forms they provide. These forms require the account holder’s signature and clear transfer instructions, along with any necessary beneficiary information. After processing, the asset is transferred, which may involve digital transfer for securities or a deed transfer for real estate. Confirm transfer completion with the custodian and retain all documentation, such as Form 1099-R for retirement account distributions, for tax reporting.