• Michael DiBartolomeo

In-Kind Transfer: What It Is and How to Do It Correctly

Sometimes, a current financial institution isn't doing enough for a person's investments. When that happens, it's possible to have them transferred elsewhere. However, the new institution must get a request to do this. An example is when an investor moves to a new online brokerage account because it has more affordable trading fees.


The question to ask here is whether an in-kind transfer or in-cash one is right.


What is an in-kind transfer

What Are They?


For an in-kind transfer of investments, that means those investments are transferred to a new company, and there's no need to buy or sell. This can only happen if the investment is available at both financial institutions. For example, all brokerage account options carry stocks, but a certificate of deposit (CD) purchased at one bank isn't likely to be available elsewhere.


Definition of an In-Kind Transfer.


Such a transfer allows investors to move investments between two different brokers. The investor doesn't have to sell an investment and then transfer those cash proceeds to the other institution. All they've got to do is move an existing investment to a new broker.

Most brokers accept these transfers, so it's easier to switch accounts. Plus, the investor avoids taxation consequences that come with selling the investment.


The investments to transfer in-kind can vary based on the brokerage. In most cases, stock options, mutual funds, bonds, and exchange-traded funds are transferred as they are.

Some investments aren't offered or supported by the new broker. In this case, they should be sold and then transfer the cash proceeds from the sale.


It's recommended to ask questions of the new brokerage about the options for the transfer of in-kind investments and not make trades on the account during the transition.


Are They Taxable?


If the in-kind transfer is correctly managed, there aren't tax impacts to report. However, there are ways to transfer investments in kind to a new broker and have problems with taxes.

It's best to consult with a tax expert before transferring. That way, any tax implications are known ahead of time.


Be very careful when transferring brokerage account firms if there are retirement accounts included. Various rules must be followed so that the asset transfer isn't called a distribution. For example, the investor should deposit the money within the new account in 60 days. It's easy to exceed that limit when handling the transfer alone. Sometimes, this results in a need to pay the taxes and penalties on the distribution amount. Such results can be disastrous if someone is transferring a large retirement account.


That's why it's wise to let the new brokerage account firm deal with the process. It can ensure that everything goes smoothly.


Generally, major tax issues have to do with asset sales. If it's necessary to sell some or all of the investments to complete the transfer, this leads to capital gains tax in some situations.


Is the Investor Charged to Move Money?


Most brokerage account firms do not charge the investor for moving money to a 401(k) or IRA from an IRA. However, the 401(k) custodian could charge the investor to issue the check for normal transfers.


It's a good idea to set up the fund so that it accepts in-kind transfers with the custodian partner. Inform the current brokerage account sales team immediately before purchasing.

Alternatively, some brokerage account firms do charge fees for in-kind transfers of assets. If someone wants to transfer 20,000 shares of a particular stock, this incurs one fee. However, if they are transferring real estate property and 20,000 shares, that incurs two fees.


Generally, this happens because the broker wants to ensure that the service team can sufficiently serve their customers, and the process is time-consuming. However, many brokerage firms do not charge anything to transfer retirement cash from the 401(k) rollover or the cash from another IRA transfer.


Coordination Required


In-kind transfers take coordination between multiple parties, such as the investor, the current IRA custodian, the new issuer of the asset, and whoever handles the title. Sometimes, brokers require more time to track down the deliverables because the transaction is slow. It's often slower than moving traditional mutual funds, private stocks, bonds, or retirement cash that have established infrastructures to support the in-kind transfer. Ultimately, the rules must be followed to avoid prohibited transactions and legal issues with the IRS.


Cash or in-kind transfer

Liquidate Money (Cash) or In-Kind Transfer?


It is possible to directly transfer the holdings from an old IRA account into the new individual retirement account. When transferring asset shares instead of selling them and transferring the cash proceeds from the asset's sale, this is an in-kind transfer. The separate custodians for the old and new IRAs have the last say for such transfers. The old custodian determines what's transferred out, while the new one figures out the assets that it can accept in-kind.


What can't be transferred can include proprietary mutual funds from an old IRA provider that's not part of this new fund family.


Disadvantages


Investing in the future is essential, but it isn't free. There is always some risk involved when investors choose to use in-kind transfers. These are a few of the disadvantages:


Fees

It is essential to remember that the cost associated with moving the account to another brokerage could include:

  • Deferred sales loans owed on the account holdings

  • A closeout fee for the account

  • Termination fees

It's common for the new brokerage to reimburse closeout fees on the old account. However, this must be requested with the in-kind transfer. In general, cash transfer options have fewer fee requirements and nominal fees. Ultimately, it can cost less to work with cash, especially from the point of view of the bank.


Loss of Possible Returns

Another disadvantage of liquidating assets into cash before the transfer of the account is holding the cash while waiting for the new account to open and have the funds processed before the investment.


The loss comes from transferring from a higher return, which is lost because the funds did not stay invested. Investors can avoid this risk by transferring their assets in kind.


In most cases, the investor should transfer everything in kind to ensure an efficient process. Typically, when the money is liquidated into cash, it's easy to lose track of the cost basis for non-registered accounts.


It could be easier to use an in-kind transfer, but the assets are transferred, and the proceeds are reinvested into the new account based on the allocations chosen, such as from a bank to a brokerage.


Typically, the fund can lose some of the returns. Though investors can add other fund options, the goal is to save money and not spend it.


Example


A great example of an in-kind transfer is if an investor has 200 shares of a stock at the ABC online brokerage. This investor decides to work with another brokerage instead. Therefore, they request the new one to complete an in-kind transfer, which can be done online sometimes. That way, the shares aren't sold, and there are no tax consequences on the account.


Transfer In-kind to 401(k)


In general, it's possible to transfer assets already owned into an IRA in-kind with a new IRA, including the 401(k).


Such an in-kind transfer requires both financial institutions to talk with each other and work hard to guarantee that the process goes well and doesn't incur implications for taxes. The investor can receive a transfer in-kind from the 401(k) and other employer-sponsored plans.


A common issue here for an in-kind transfer might occur if the investment is exclusively offered at the old institution. The brokerage transferred the funds, but they can't go anywhere because the new bank doesn't provide them.


This typically happens with in-house mutual funds for various brokerage companies. It doesn't allow other brokers to hold it on the investor's behalf.


As far as that's concerned, there may be no choice but to sell the mutual funds and add the proceeds to the new fund. However, with various assets, it's possible to complete an in-kind transfer.


Bottom Line


In-kind transfers tend to have various benefits. However, it's not something that should be done without planning. Though it's possible to use cash instead, most investors want the transition to be smooth. It may be ideal to talk to a personal financial advisor about the individual funds that must be moved.


There are various personal financial services available from a personal financial advisor. Learning about what these professionals offer can help determine if in-cash or in-kind transfer options are best.


In a sense, there is always a risk when investing, but a personal financial advisor can help to lower that or explain financial terms such as a default risk premium.


The future is bright, but it takes planning to get things done correctly.








Disclosures:


Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners, LTD., a registered investment advisor. Stratos Wealth Partners, LRD. The Kelley Financial Group, LLC are separate entities from LPL Financial.


This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The content is developed from sources believed to be providing accurate information.


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