I am 74 and must make a IRA RMD of $2,756 ... the 50% penalty is $1,378 for NOT taking this RMD before end of 2016, correct?

[robftate]

The reason I don't want to take it right now is because my IRA is invested in a single stock that has lost 90% of its value over the past 2 yrs ... I am hoping to hold the stock until it rises again enough to get back some of all of my original investment... taking the RMD of $2,756 right now would cost me $23,476 in lost capital ... of course I may NEVER get back my original capital, but the stock has a tendency to RISE every April ... so maybe it is better to "eat" the 50% penalty right now and hopefully in April 2017 take the 2016 RMD at a lesser loss of capital? And then try to explain to the IRS why the distribution was late?

[SweetieJean]

"taking the RMD of $2,756 right now would cost me $23,476 in lost capital"  Do you really expect it to rebound that much in a few months?  Also keep in mind that, as the value of the IRA increases, so will your future RMD.

[SweetieJean]

"stock has a tendency to RISE every April: Then consider taking your 2017 RMD in April.

[dmertz · Accepted solution]

To avoid the 50% excess accumulation penalty, you must make the distribution by December 31, 2016.  Intentionally delaying the distribution beyond year-end would not constitute reasonable cause for the IRS to waive the penalty.

You do have the option to simply not take the RMD and to pay the $1,378 penalty.

You could take the distribution as an in-kind distribution, but your cost basis would become the value on the date of distribution and the rebound would be taxed as a capital gain when realized.

If you have multiple traditional IRA accounts, you can satisfy this RMD with a distribution from the other traditional IRA account.

To avoid RMDs going forward and to minimize taxes, you should probably consider converting the traditional IRA to a Roth IRA while the value is temporarily down.

[SweetieJean]

"my IRA is invested in a single stock"  Good recommendation re Roth conversion!

[dmertz]

A complication to doing a Roth conversion is that it can only be done on the remaining balance *after* having satisfied the year's RMD, so it may be impractical.  Doing a Roth conversion before the end of 2016 would require first taking the $2,756 RMD.  It might be more practical in 2017 when the RMD will probably be only about $286 (if the 2016 RMD is not taken and the penalty is paid), assuming no appreciation between now and the end of 2016.

[fanfare]

Just liquidate the entire IRA, and buy the stock back in a traditional brokerage account if you believe it will come back. Then you would get favorable capital gains treatment after twelve months. you could even pay your RMD out of margin loan on a margin account.

[dmertz]

fanfare's suggestion may be the most practical.  However, I would take the RMD in-kind, then convert the remainder of the traditional IRA to Roth.  The appreciation in the stock from the RMD now held in a nonqualified brokerage account would eventually be taxed at capital gains rates instead of as ordinary income from the IRA (or would receive a step-up in basis at your death), while the portion converted to Roth would eventually be entirely tax free once the 5-year Roth qualification period is met (and it may already be met if you have another Roth IRA).

[robftate]

I WISH TO THANK  EVERYONE FOR THEIR REMARKS ... since I live on Soc Sec and am 74, I'd better just take the penalty right now and figure out what to do in 2017?

[fanfare]

If you take an RMD and buy the stock, the RMD tax is not due until April 18th.

[dmertz]

If it was me, I would probably do as I indicated in my comment immediately prior to this one: Take the $2,756 RMD in-kind before the end of 2016, then convert the remainder to Roth before the end of 2016.  With Social Security as your only other income, long-term capital gains will be taxed at 0% unless you realize enough in capital gains to begin to increase your marginal tax rate above zero.

[dmertz]

"If you take an RMD and buy the stock, the RMD is not due until April 18th."
I'm not sure what you are trying to say.  The RMD must be distributed before year-end 2016.

[fanfare]

I edited my comment replace "RMD is not due" with "RMD tax is not due".

[dmertz]

That's what I thought, but the tax is actually due by January 16, 2017.  Only if a safe-harbor underpayment penalty exception is met could the tax payment be delayed until April 18, 2017.

[fanfare]

If you're saying make a Q4  Estimated Tax payment on the RMD,  I doubt many people taking RMDs would do that. And if he did not, there would probably not be a penalty anyway.