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Investing Specialists

2 Good Reasons to Consider an 'In-Kind' Distribution

Do you have highly appreciated company stock or depressed IRA holdings? Here's why taking the cash may not be the best idea.

In-kind distributions--meaning that an investor receives a payout of investment securities from an entity instead of cash--are more common than you might know, especially among very large, institutional investors.

Companies that pay out dividends may choose to issue in-kind distributions, paying out additional shares of stock rather than cash. Exchange-traded funds also may pay off departing shareholders by conducting "in-kind" transactions. When a large ETF investor, called an authorized participant, wants to sell its shares, the ETF can give the institution its money back in the form of securities held in the portfolio. In this way, the ETF can flush out highly appreciated securities in its portfolios (that is, those with a low cost basis), helping to improve the ETF's tax efficiency.