(A version of this article originally appeared in the September 2022 issue of Military Officer, a magazine available to all MOAA Premium and Life members. Learn more about the magazine here; learn more about joining MOAA here.)

In some tough economic times, the federal government has suspended required minimum distributions (RMDs) for retirement accounts for the year. In 2020, RMDs were suspended to help provide relief during the pandemic, and RMDs were waived for 2009 during the Great Recession. Uncle Sam doesn’t make that move lightly, or very often.

One option is to wait to take your RMD until closer to year-end to see if any reprieve is granted. But in the event that there is no suspension of RMDs and you don’t need the money to cover expenses, you have an option that can help you avoid locking in losses while still taking your RMD — the in-kind transfer.

Ask your account custodian to do an in-kind transfer of investment shares to a taxable brokerage account in an amount that equals the value of your RMD. You will still pay ordinary income tax on the RMD amount. But instead of cashing out the shares and locking in losses in a down stock market, the shares can grow in the taxable account when the market bounces back.

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After the shares have been transferred in kind, doublecheck with your custodian that the total transfer value meets your RMD amount. You want to ensure that investments that were valued at the market close price on the day of transfer didn’t fluctuate lower than you expected.

If the transfer fell short of your RMD, you’ll need to move more shares or withdraw cash from the retirement account to make up the difference so that you satisfy your full RMD. That way you’ll avoid being subject to a penalty worth 50% of the RMD shortfall.

Your basis in the shares will be the value of the date of transfer. When it comes time to sell the shares from the taxable brokerage account, you’ll owe tax on any appreciation. If the shares instead end up with your heirs, the shares’ basis will jump up to the value on your date of death — with any appreciation being tax free for your heirs.