Can a Roth Conversion Be Moved in Kind?

For some people who have traditional IRAs or other retirement plans, switching to a Roth IRA can be beneficial in the long run. If you’ve talked to a financial adviser and concluded you are better off with a Roth IRA, the next step is to convert your existing plan by moving the money to a Roth. You may want to consider an in-kind conversion. Under the right circumstances, transferring securities instead of cash can be financially advantageous.

TL;DR (Too Long; Didn't Read)

You can do an in-kind conversion to move your securities to a Roth IRA. Doing so can actually have some financial benefits.

IRS Rules on IRA Transfers

Internal Revenue Service rules let you move assets between traditional IRAs and other tax-deferred retirement accounts such as 401(k)s with no tax consequences. You can do the same with transfers between Roth IRA accounts.

When you move money from a tax-deferred account to a Roth IRA, it is called a conversion, and you must pay income taxes on the assets you transfer in the year the conversion takes place. This is because funds in a tax-deferred account are pretax dollars and are taxable when you withdraw them, even when you put the money straight into a Roth IRA. All deposits to Roth IRAs must be after-tax dollars.

How In-Kind Transfers Work

When you contribute to a traditional or Roth IRA, you can only deposit cash. You cannot place investment securities or property you already own into an IRA. However, you can move assets like stocks and bonds from one IRA account to another.

When you move assets instead of cash, it is called a transfer-in-kind. For example, you can move 100 shares of IBM stock from a traditional IRA to a Roth IRA. To carry out a transfer-in-kind, tell the trustee of the existing account to execute a trustee-to-trustee transfer of the assets to the new IRA without liquidating existing investments.

Advantages of a Transfer-in-Kind

There are some benefits to converting assets to a Roth IRA via a transfer-in-kind. For one thing, you don’t have to pay a lot of fees and commissions for selling securities and then reinvesting the cash once it is deposited in the Roth IRA. You do not have to sell off assets before you are ready to, so you don’t sacrifice potential investment profits to make the conversion. Depending on the nature of your IRA holdings, the taxable amount may be less if you do not sell off the investments and move the cash.

Tax Consequences of the Conversion

It is best to use money from a source other than the IRA to pay taxes on the converted funds. The reason is that the assets you convert are supposed to go directly into the Roth IRA. If you withdraw funds and use them to pay taxes, the withdrawal must be in cash, so you might have to liquidate some assets.

In addition, money withdrawn from the IRA to pay taxes is itself subject to income tax. Since the money does not go into the Roth IRA, it is an early withdrawal unless you are 59 1/2 years old and therefore is also subject to an extra 10 percent penalty tax.

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