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Mar 20 2009 12:00AM

Question

I want to transfer my traditional IRA to my employer's 401(k) plan. I was instructed by my job counselor to transfer the funds to my 401(k). Should I sell the funds and then transfer the money or should I do an "in-kind" transfer?

Answer

According to FPA member Duffy G. Elliott, CFP®, president of Elliott & Associates Wealth Advisors, the answer depends on your 401(k) plan. Most 401(k) plans will only accept cash, so you will likely need to sell the funds.

By the way, "in-kind" means transferring the assets — stocks, bonds, and mutual funds — in their current form. For example, if you own 200 shares of Home Depot in your IRA, the "in kind" transfer would send those 200 shares of Home Depot to your 401(k) plan. Again, most 401(k) plans don't allow for that. You may want the firm that currently holds your IRA to transfer a check directly to your 401(k) plan provider.

Another financial planner, FPA member Raymond D. Branton, CFP®, had this opinion: "The answer to your question depends on how happy you are with your investment and whether your employer's 401(k) administrator will allow the transfer. "In kind" simply means you want to remain invested as you are now. If you do not care to remain invested as you are now, you simply have the firm that holds your IRA sell the investments in the IRA and transfer the dollars to your 401(k) plan. You may be forced to sell the investments anyway, as your employer's 401(k) administrator may not offer those same investment choices.

Branton also noted that that since your funds are in a tax-sheltered account, an IRA, there is no tax consequence to selling and transferring the cash, though you will incur trading costs. 

One word of caution: If your IRA has any basis, if you made any non-tax-deductible contributions, you should leave it intact, Branton said. "Transferring the balance will forfeit your basis. As well, if your basis exceeds the current value of your IRA, you may have a tax-deductible loss if you close your
IRA. Transferring the funds will forfeit the potential loss deduction."

Also, consider how long you have been with your current employer, Branton said. "You may want to delay any transfer if you have had little to no interaction with the 401(k) administrator. Rolling over funds to the administrator's custody may leave you frustrated if you leave employment. As well be sure the rollover is included with funds already fully vested; otherwise, you risk losing funds due to the administrator's poor accounting."

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