In-kind transfer for a traditional 401(k) to IRA rollover

Question

I'm rolling over a 401(k) that is holding only VIVLX, a Vanguard target date fund, to a brokerage. It's not proprietary but it is the institutional class of the fund, so my brokerage minimum for purchasing it is $100M, but in-kind transfers might be different.

In general, is an in-kind transfer from a 401(k) to an IRA allowed? Are there any special tax implications that are different from a cash rollover?

It's a great fund for a retirement account that I don't have to think about and the fees are incredibly low so it'd be nice to just hold it. Obviously, I can do a cash transfer and buy something similar.

I'll probably have to call the brokerage to find out. Would they even allow an in-kind rollover like this?

Answer 1

The issue for you is that your 401(k) investment in this fund is part of a large pile of money from your co-workers, and other companies that have either a 401(k) contract with Vanguard or their 401(k) custodian has a contract with Vanguard. The reason the costs are low is that the Vanguard retail division doesn't have to manage those accounts, they just see it as a pile of cash from the 401(k) custodian.

So unless Schwab has a similar contract with Vanguard for this option in the IRA accounts, it is unlikely that you can get the same class of shares. It is also possible that Vanguard wont sell this class of shares to other brokerages except through 401(k) arrangements.

There is no tax difference, because even if the Schwab account could hold the shares the transaction would be in cash either electronically or via paper check. Remember your money in target date fund in the 401(k) is just part of a larger pile from the 401(k). There is no tax difference unless the color of the money is changing for example from pre-tax 401(k) contribution to Roth-IRA.

Answer 2

In general, is an in-kind transfer from a 401(k) to an IRA allowed? Are there any special tax implications that are different from a cash rollover?

The simple answer is yes, in kind transfers are allowed and there are no different tax implications.

As mhoran pointed out, you may not be able to keep the same share class. You would need to call the brokerage to find out if an in kind transfer would preserve your share class. That’s something you’ll want to get in writing too, since if you’ve separated from service you won’t be able to get your money back into the 401k if you find out the person you talked to was mistaken. If you want to ensure keeping your fund and share class you may not want to roll it over. Keeping it in the 401k also preserves your opportunity to do a back door roth conversion.

Answer 3

It strikes me as unlikely that you will be able to keep the shares of the institutional fund. And even if you can, I would be shocked if you could add more to your investment in it.

There is some good new though. VIVLX's has a low net fee of 0.09%. Schwab has a target date fund for 2055 with a 0.08% net fee under the ticker SWYJX, which you will be able to to add more money to without paying any extra fee.