What Is In-Kind vs. In-Cash Stock Rollover?

Account holders can choose between an in-kind or an in-cash rollover for their IRAs.
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A person with a retirement plan, such as a 401(k) or an individual retirement arrangement, can transfer funds from one plan to another through a "rollover." Investors can choose either an "in-kind" or an "in-cash" rollover. The "in-kind" rollover allows investors to transfer funds into another non-cash investment vehicle, such as stocks or mutual funds. An "in-cash" rollover allows investors to move the current cash value of one retirement plan to another.

Advantages of In-Kind Rollover

The in-kind rollover process starts when the investor transfers the proceeds from the tax-exempt retirement account to a brokerage account or other taxable account. Although the proceeds from the brokerage account are taxable, the chief advantage of an in-kind rollover comes with the difference in tax rates. When the company stock in the brokerage account appreciates in value, the investor is liable for capital gains tax. The top capital gains tax rate is 15 percent, while the top earned income tax rate is 35 percent.

Drawbacks of In-Kind Rollover

The main drawbacks to the in-kind rollover also involve taxes. The proceeds from an in-kind rollover are taxed at the ordinary income tax rate at the time of the transfer. The tax liability amount is based on the average value of the shares when they become part of the retirement plan. Investors under the age of 55 who make an in-kind transfer will owe a 10 percent penalty tax for not keeping the proceeds in the fund until they reach retirement age.

Advantages of In-Cash Rollover

The in-cash rollover affords the investor a higher degree of control as to where the proceeds go and how they can be distributed. For instance, an investor with a company-sponsored 401(k) plan can make an in-cash rollover to a conventional IRA, a Roth IRA or an SEP IRA. With these accounts, the investor can select from a wide range of stocks and mutual funds, rather than staying with stock selected by the 401(k) plan manager.

Drawbacks of In-Cash Rollover

The in-cash rollover is also susceptible to the taxes on transferring funds from one account type to the other. The investor must rollover the entire amount within 60 days. If the entire amount is not transferred, the difference is considered an early withdrawal. The early withdrawal amount is taxed at the standard income tax rate plus a 10 percent penalty. Also, when rolling over a 401(k) to an IRA, the former employer holds back 20 percent for income taxes.

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