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Transferring mutual funds from your 401(k) to your IRA

Posted by Andrew Chan  April 19, 2010 02:30 PM

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Can I do a rollover of the mutual funds in my 401(k) to an IRA and keep the same funds? Or, do I have to sell the funds in my 401(k), transfer the cash, and repurchase the same funds in my IRA account?

In general, you should be able to rollover the mutual funds in your 401(k) to your IRA account as long as the mutual funds being transferred are not propriety to the 401(k) and the custodian of your IRA account can hold the funds being transferred. To be sure, you should check with your employer's HR department or your 401(k) plan administrator to see which funds, if any, are propriety. In addition, you should check with your IRA custodian to make sure that they can hold the funds being transferred.

Once you've confirmed which funds can be transferred, you should transfer the funds in-kind, by doing a "direct transfer" to your IRA. A direct rollover is a transfer of your 401(k) assets directly from the trustee of your 401(K) to the trustee/custodian of the IRA in your name. Mutual funds that cannot be transferred will be liquidated and the cash proceeds will be transferred.

A direct transfer is also known as a "trustee-to-trustee" transfer because you do not receive actual possession of the assets being transferred. Direct transfers are preferable because they allow you to avoid the mandatory federal income tax withholdings on distributions from tax-deferred retirement plans.
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