Opening an IRA is a great way investors can save for retirement, because they offer up-front tax savings in many instances as well as ongoing tax benefits both before and after you retire. In some cases, investors prefer to fund IRAs with investments they already own rather than cash. These in-kind transfers aren't always allowed, though, so it's important to know the rules covering them.
In-kind transfers from regular taxable brokerage accounts: not allowed
The biggest question in deciding whether you can do an in-kind transfer into an IRA is where the asset you want to transfer currently is. For asset transfers involving assets that you hold outside of a retirement account, such as in a regular taxable brokerage account or taxable mutual fund account, you're not allowed to do an in-kind transfer to an IRA.
The reason is that such transfers are treated as contributions to the IRA, and IRA contributions must be made in cash. You can achieve the same end by selling the asset in the taxable account, contributing the proceeds to the IRA, and then repurchasing the asset within the IRA. However, you'll pay taxes on any gain resulting from the sale in the taxable account, and that makes it less attractive than an in-kind transfer would be if it were available.
In-kind transfers from other IRAs or 401(k)s: usually allowed
On the other hand, if you already own assets in an IRA and want to transfer them in-kind to another IRA, you can generally do it. These transfers simply involve having the two financial institutions involved communicate with each other to ensure that the process goes smoothly without causing any tax consequences. Similarly, you can receive transfers from a 401(k) or other employer sponsored plan into an IRA in-kind.
The only potential hang-up with in-kind transfers comes if you own proprietary investments that only your current financial institution offers. This often comes up with a brokerage company's in-house mutual funds, which it won't allow other brokers to hold on your behalf. With such assets, you might be forced to sell fund shares rather than transfer them in-kind. With stocks, bonds, exchange-traded funds, and even some mutual funds, you can usually get an in-kind transfer done.
In-kind transfers can be convenient, but unfortunately, they're not always available. In the rollover context, however, they can prevent you from having to go through the process of selling and rebuying assets in a new account.
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