401k Redirect Current Balance and Future Contributions?

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Topic Author
RPG
Posts: 3
Joined: Wed Oct 21, 2015 2:23 pm

401k Redirect Current Balance and Future Contributions?

Post by RPG » Thu Oct 22, 2015 10:53 am

Hello,

I am almost done reading “Bogleheads” and it’s a wonderful book. It’s inspired me to get my retirement planning in better shape. I would like to Redirect Current Balance and Future Contributions of the funds in my 401k from a mix that I arbitrarily chose almost 10yrs ago to the DOW JONES TARGET 2045 FUND. When I attempt to do this I receive a message about taxation and I am confused as to whether or not I am doing the right thing or if this is going to cost me. The message reads:

The transaction you are about to complete includes transferring investments out of either the Wells Fargo ESOP Fund or the Wells Fargo NonESOP Fund. As a result of this transaction you will lose your current cost basis in the shares of Wells Fargo & Company Stock allocated to your account to the extent of the transfer. This will be the case even if part or all of the transaction involves moving investments from the Wells Fargo ESOP Fund to the Wells Fargo NonESOP Fund (or vice versa). Under the terms of the Wells Fargo & Company 401(k) Plan, you may receive a distribution of shares of Wells Fargo & Company Stock allocated to your investment in the ESOP and NonESOP stock investments. Such an in-kind distribution may qualify for deferral of tax on the amount by which the value of those shares at the time of distribution exceeds their original cost basis (their "net unrealized appreciation"). This special tax treatment of the net unrealized appreciation of Wells Fargo & Company Stock distributed to you from the plan may or may not be advantageous, depending on your individual tax situation.
By clicking "OK" below, I acknowledge that I have read and understand that the transaction I am about to complete may result in the loss of the current cost basis in shares of Wells Fargo & Company Stock allocated to my account in the Plan, that I understand the potential consequences of this transaction on the tax treatment of Wells Fargo & Company Stock distributed to me, and I wish to proceed with the transaction.

This is my current mix:

4%___DOW JONES TARGET 2050 FUND
4%___S&P 500 INDEX FUND
9%___LARGE CAP GROWTH FUND
4%___S&P MID CAP INDEX FUND
4%___SMALL CAP FUND
7%___INTERNATIONAL EQUITY FUND
11%__NASDAQ 100 INDEX FUND
57%__ESOP FUND

My situation:
34yrs old
According to projections by my 401k provider I’m on track to retire with $1M+
Married____husband has modest 401k, my 401k will be our primary retirement resource
No savings
Debt (>8k student loan, 5yrs/>200k mortgage, 30yrs)
Plan to begin fully funding Vanguard ROTH accounts in 2016 and start emergency fund

Do the Bogleheads have any advice for me as to how to proceed? Redirect current and future balance? Redirect future balances only? Leave as is? This is a lot of money (all the money that I have, in fact) I want to do the right thing.

Thanks for this wonderful resource.

niceguy7376
Posts: 2515
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: 401k Redirect Current Balance and Future Contributions?

Post by niceguy7376 » Fri Oct 23, 2015 9:32 am

I am not an expert in ESOP plans. Do you know what kind of discount you are getting on the price of the share?

I previously had option to buy company stock at a discount but it was not within the 401k but outside of it. Yours looks like it is within the 401k. Am i Right? if so, i dont understand how there will be a tax benefit.

Topic Author
RPG
Posts: 3
Joined: Wed Oct 21, 2015 2:23 pm

Re: 401k Redirect Current Balance and Future Contributions?

Post by RPG » Fri Oct 23, 2015 9:48 am

Yes, the company stock is within my 401k. My employer puts their matching contributions in the form of company stock, that's how I understand it. I do not believe that the shares are purchased at a discount rather the value of the stock at the end of Q = to that of my contributions is purchased and added to my portfolio. I don't understand how there will be a tax benefit either. The tax portion of investing (though I'm trying to learn) is confusing to me. I fear that if I redirect the current balance that I'll be taxed if there are capital gains, which after 10yrs I thing there have been. I'll try to see what I can find out on the company site but so far it's been Greek to me.

ThisTimeItsDifferent
Posts: 247
Joined: Sat Jan 31, 2015 2:51 pm

Re: 401k Redirect Current Balance and Future Contributions?

Post by ThisTimeItsDifferent » Fri Oct 23, 2015 10:06 am

I think it is just saying that you lose the option of using "Net Unrealized Appreciation" when taking a future distribution of company stock (at retirement) not that you would be taxed now.

"Net Unrealized Appreciation" of company stock gives you the option when withdrawing from a traditional 401k of paying income tax on the original cost basis of the company stock, holding it for a year, then paying the lower long term capital gains LTCG tax on the difference between the original cost basis and the sale price. In contrast, one normally pays ordinary income tax on the distributed amount of non company stock investments.

In both cases, you still pay tax on the whole amount when you later take a distribution/withdrawal.
With NUA, you pay income tax on the original basis/purchase price and LTCG tax on the difference between that original price and the sale price.
With ordinary distributions, you pay income tax on the whole sale price.

While NUA can be useful to reduce taxes, it requires holding company stock in the 401k (eggs in one basket) instead of a diversified portfolio. Your income stream is already based on individual company performance, do you really want your retirement 401k to be based on that also (think not just "Enron" but the higher volatility and risk of any individual stock)?

The main goal is not to minimize taxes but to optimize after tax returns, considering risk and volatility.
Last edited by ThisTimeItsDifferent on Fri Oct 23, 2015 10:08 am, edited 1 time in total.

bogleaff0
Posts: 5
Joined: Thu Jul 23, 2015 9:58 am

Re: 401k Redirect Current Balance and Future Contributions?

Post by bogleaff0 » Fri Oct 23, 2015 10:08 am

> I am not an expert in ESOP plans. Do you know what kind of discount you are getting on the price of the share?

Note that there is ESPP and ESOP (my company has both). My company ESPP ("purchase plan") is after-tax withholding to purchase stock at a discount, while my company ESOP ("ownership plan") is a company stock fund that is used for my company 401(k) match (i.e. employer contributions) as part of our 401(k) plan - I don't think we get a discount if we opt for additional employee-funded ESOP shares in our 401(k).

> When I attempt to do this I receive a message about taxation and I am confused as to whether or not I am doing the right thing

Found this on the internet: http://teamworks.wellsfargo.com/benefit ... ssible.pdf - which says this:
Net unrealized appreciation is generally not taxed to you at the time that the stock is distributed to you as part of a total distribution of the balance of your 401(k) ...
The way I read it, when you start withdrawing from your 401(k), you have the option to take your ESOP shares as actual shares ("in-kind") instead of liquidating them and taking it out as cash. As such, you won't be taxed that same as you would if you took it out as cash (instead you would be taxed in part at distribution one way and then taxed in part when you sold, probably as long-term capital gains).

So, if you exchange your original ESOP shares for something else, the message is warning that you would lose the option for in-kind distribution of those shares and the possibly advantageous special tax treatment when you start withdrawing from your 401(k).

> I would like to Redirect Current Balance and Future Contributions of the funds in my 401k ... I am confused as to whether or not I am doing the right thing or if this is going to cost me.

> 57%__ESOP FUND

I'm definitely not an expert, but there's a risk in having a signficant chunk of your retirement portfolio in company stock - you are potentially doubly affected by the performance of the company since its your source of income and affects your portfolio performance. For me, I can't envision the potential tax advantages years from now as offseting that risk (though risk and return often go hand-in-hand). I would think that diversing your portfolio, e.g. Boglehead lazy portfolio or a target date fund, would lower your risk and be more prudent.

niceguy7376
Posts: 2515
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: 401k Redirect Current Balance and Future Contributions?

Post by niceguy7376 » Fri Oct 23, 2015 10:21 am

thanks for the clariification about ESOP and ESPP (which I had).

With that new info, I would immediately do the future contributions to other funds rather than the stock. This will atleast reduce the % of stock against the total 401k to go down with each contribution. Then based on your final decision about the stock that you already inherited, you can act accordingly.

Topic Author
RPG
Posts: 3
Joined: Wed Oct 21, 2015 2:23 pm

Re: 401k Redirect Current Balance and Future Contributions?

Post by RPG » Fri Oct 23, 2015 10:29 am

Thanks everyone for all the input.

In a nutshell:
I can/should redirect current AND future to the DOW JONES TARGET 2045 FUND without penalty which will hedge my risk because it will diversify my portfolio and sever the link between my investment performance and the company's performance?

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