Understanding in-kind transfers and the investments that qualify

When it's time to choose a financial services provider for your investments, finding one with the product choices you're looking for and professionals you trust can make it easier to reach your long-term goals. Even if you're investing at one place already, you may find that an account somewhere else better meets your needs.

Fortunately, you may not have to overhaul your entire portfolio if you make a switch. In-kind transfers allow you to keep your existing assets and avoid tax consequences even when you move to a different financial institution.

In-kind transfers occur when you move the securities you already own in an IRA or investment account to a different financial institution. Instead of selling the assets for cash and buying new securities at another financial institution, you simply transfer what you have when you open an investment account or retirement account at the new place.

Typically, these transfers involve moving assets from accounts of the same type. For instance, you can move stocks and other securities held in one IRA to another IRA or from one taxable account to another taxable account. Because you're not buying or selling the assets—just transferring—there are typically no tax consequences.

You can move most securities to a different broker through in-kind transfers, including:

• Stocks
• Bonds
• Mutual funds
• Exchange-traded funds (ETFs)
• Money market funds
• Options
• Brokered certificates of deposit (CDs)

However, certain financial assets generally can't be transferred. These include:

• CDs purchased directly from a bank
• Annuities
• Life insurance policies
• Low-priced securities traded over the counter (OTC)
• Commodities

Most, but not all, brokerage companies allow these transactions. However, to perform in-kind share transfers, both financial institutions must carry the exact same security. For example, when you want to move mutual fund shares to a new broker, the receiving firm has to offer the mutual fund you already own.

Shifting your existing investments to a new financial company can be wise for several reasons. Here's why you might consider doing an in-kind transfer:

If you find it challenging to manage multiple investment accounts, consolidating your assets may be the solution. Your decision on which to merge may be based on many things, but it can help to go with a company that you trust, find easy to work with, understands your goals and has a range of options and advice for your whole financial picture. The company you decide to go forward with can help you determine if the other assets you have can be moved by an in-kind transfer.

Financial companies sometimes reduce commissions and other fees when you do more of your business with them. If you invest using one institution but use a financial advisor at another, ask your financial advisor about the potential perks of moving over your investment account. Even if there aren't potential discounts, it's good to know about the possibility of in-kind transfers in case you want to move your investments to a place with lower fees without selling assets and incurring taxes.

When you own securities that have appreciated in value, selling your shares can trigger the capital gains tax. When you perform an in-kind transfer, however, you simply move those assets to a different company. In most cases, that means in-kind transfers avoid taxes in the short run if you need to move them but don't want to sell them.

If you own a pre-tax workplace retirement plan or IRA, you typically have to take required minimum distributions (RMDs) starting at age 73. Transferring assets in kind from those tax-advantaged accounts to a taxable account allows you to satisfy your required minimum distributions while retaining ownership of your shares. It's a move that can make sense if you don't need extra cash for the time being and you don't want to let go of a particular asset during a market downturn.

Transferring retirement account assets to a taxable account qualifies as a distribution, so you'll have to pay tax on the value of the securities you distribute in kind. For example, if you're in the 24% tax bracket and transfer stock worth $30,000, you'd have to pay $7,200 in federal taxes. The cost basis of those shares will then reset to the market price at the time of the transfer. The tax consequences of transferring assets to accounts with different tax treatments can be complex, so you may want to consult with a tax advisor beforehand.

While shifting your securities from one financial firm to another can provide benefits in certain situations, you also should consider the potential drawbacks.

Some investment firms charge either a flat fee or a percentage of the assets when you move securities out of your account. If it's a fixed fee, companies sometimes will charge you for each type of security you transfer—for instance, one fee for mutual funds and one fee for individual stocks. Be sure to research the fee schedule ahead of time so you're not caught off guard. It's possible that your new brokerage will reimburse you for any transfer fees you incur, but you should ask about their policy ahead of time.

Even if the receiving brokerage accepts in-kind transfers, they have to offer the securities you're trying to move. If they don't, it can be a problem. For example, if you own proprietary funds that are marketed by the original firm, you may have to sell your shares and use the cash to buy similar funds at the new broker, rather than transferring those assets directly.

In general, transferring assets in kind to the same type of account doesn't trigger income taxes—that's one of its biggest advantages. But you do need to be careful. If there are any securities that your receiving brokerage doesn't offer, you'll have to sell them first, which can lead to capital gains taxes (or capital losses) if in a taxable account. If you're moving securities from a retirement account through an indirect rollover, you may be on the hook for taxes plus an early withdrawal penalty if you don't deposit your sale proceeds into another retirement account within 60 days. Most investors do direct rollovers, so this wouldn't apply in that process.

Once you identify a desired financial institution for your assets, performing in-kind transfers requires a few basic steps:

1. Open an account with a new company. The brokerage or IRA provider you select will need certain personal information, including your name, address, birth date and Social Security number.
2. Make a request from your existing company. You sometimes can ask for an in-kind transfer through the company's website, but you may have to contact the customer service department to let them know which securities you'd like to move. Be prepared to provide the account number as well as the fund number or ticker symbol for any assets you want to transfer.
3. Make sure the transaction goes through. For most securities, your assets should appear in the new account within a week. The process can take longer if you have thinly-traded securities. Make sure to monitor your account until all your assets have moved. Follow up with both firms to help avoid any unnecessary delays—especially if you have retirement assets that are subject to the 60-day rule (only if indirect rollover).

Often, in-kind transfers offer a convenient and tax-efficient way to manage your investment portfolio. Take control of your financial future by talking with a Thrivent financial advisor about the best way to reposition your assets.