Rolling stock from old 401k plan to brokerage account

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ladybug810
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Rolling stock from old 401k plan to brokerage account

Post by ladybug810 »

My husband has a 401k account from a previous employer at Vanguard. I've finally been able to convince him to rollover that 401k account into a rollover IRA so we'll have better investment options to choose from.

In the 401k plan is about $20,000 of company stock from his previous employer. While I detest holding single stock, he really wants to keep it. Since it's a small percentage of our overall portfolio, I agreed to lose that battle for the sake of "winning the war". (I've been trying to get him to rollover his old 401k into an IRA for six years! I've also been able to get him to agree to an asset allocation plan and to invest in index funds. Even though I've been the hands-on money person in our marriage, he has a difficult time taking investment advice from me since he was the Finance major in college, so these small victories are significant!)

As I've researched this topic on the Vanguard website, I run into conflicting information. Some pages say I can roll it into a rollover IRA, other pages say it can go into a "brokerage IRA", and when I actually start the rollover process online, it only gives us the option to either sell the stock and put it in the new rollover IRA in a money market fund, or open a Vanguard brokerage account.

Are there going to be tax implications if the stock goes into a regular brokerage account? Normally I would just pick up the phone and call Vanguard, but I'm not on the account. If I read the statements correctly, I think the cost basis is about $6k. Any advice on what to do or where to look for more information would be greatly appreciated!

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LadyGeek
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Re: Rolling stock from old 401k plan to brokerage account

Post by LadyGeek »

Welcome! The wiki might be able to help: IRA Rollovers and Transfers

I'm not an expert, so I'll defer on giving advice. However, the defining document is IRS Publication 590, which you'll find referenced in the article. Don't forget to check the sidebar menu on the right-hand side for more background.

BTW: If you already have a Vanguard account, you can get access to your husband's info (and vice versa) by filling out a few forms: Grant access to your accounts (Scroll down the page to find it). You may be able to do this online.
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Duckie
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Re: Rolling stock from old 401k plan to brokerage account

Post by Duckie »

Vanguard has two sides to it. The mutual fund side (Vanguard) and the brokerage side (Vanguard Brokerage Services). If you want to move the company stock "in kind" then you have to open a rollover IRA on the brokerage side at VBS.
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Re: Rolling stock from old 401k plan to brokerage account

Post by Geologist »

You should investigate whether you should take the stock out of the retirement plan to use the "net unrealized appreciation" (NUA) tax treatment. This can be advantageous especially if the cost basis of the stock is low relative to the market value. On the other hand, you don't give your husband's age and the 10% penalty can apply to this if he is less than 59.5 years.

NUA is described further in the wiki.
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Re: Rolling stock from old 401k plan to brokerage account

Post by mhc »

You should be able to call Vanguard and have them explain it to you. You are not asking for private information. You are asking about procedural issues.

My guess is that Vanguard would tell you that if you want to keep the stock, you have to put it into a IRA brokerage account. Non-brokerage Vanguard accounts cannot hold stocks. You would not put the stock into a "regular" brokerage account. It would have to be an IRA brokerage account to avoid taxes.

BTW, I think your husband can give you the authority to act on his behalf at Vanguard. I know this is possible on-line, so I assume you can do the same for calling.
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Re: Rolling stock from old 401k plan to brokerage account

Post by LadyGeek »

Geologist wrote:NUA is described further in the wiki.
Which would be here: Net Unrealized Appreciation - NUA
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ladybug810
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Re: Rolling stock from old 401k plan to brokerage account

Post by ladybug810 »

Thanks, everyone. I sure learned a lot from reading the links posted. I did speak with a rep at Vanguard today and she said whether or not we could rollover the stock depended upon how the plan rules were written. What's posted online makes it look like it's allowed, but the Vanguard rep said we'd still need to contact the former employer for the appropriate paperwork and to make sure I'm reading the plan rules correctly. I'm making progress!
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Re: Rolling stock from old 401k plan to brokerage account

Post by Alan S. »

With respect to NUA potential, an NUA cost basis of 30% is on the fence regarding viability for utilizing NUA vrs rolling the stock over to a rollover IRA. It is not clear where the 6,000 cost basis came from but for NUA purposes it would have to come from a quote from the plan administrator.

If the 6,000 is the actual NUA cost basis, and he elected NUA treatment, a full distribution (LSD) of all assets of this plan and similar plans of the employer would be required, ie all assets would have to be distributed before the end of the year.

6,000 would be taxed at the ordinary income rate and would be subject to the 10% penalty unless:
1) He separated in the year he reached 55 or later
2) He reached 59.5 by the date of the share distribution
3) Or he had some other penalty exception waiver that could apply.

If the 10% penalty applied, it is only charged on the cost basis, not on the NUA (14,000). The shares could be held, but if sold the 14,000 of gain would be taxed at the lower LT cap gain rate. Gains in addition to the value at distribution are taxed at the ST rate until the shares have been held in the brokerage account for over 1 year, then all gains would be taxable at the LT rate. The arbitrary 30% cost basis figure for NUA could be increased if you need the funds for other purposes since any rate less than the ordinary income rate would be a tax savings if you needed 20,000 from the plan, but the penalty portion would have to be considered as well.

While these shares should be able to be rolled over to a rollover brokerage IRA account in kind, once the shares are placed in an IRA, NUA potential has been forfeited and the shares are like any other IRA investment. Note that if he made after tax contributions to the plan and elected NUA, he could check with the plan to determine how much of the after tax amount could be assigned to the NUA shares because that amount would reduce the NUA cost basis and the amount taxed at ordinary income rates and also reduce any potential penalty.

But he should start with a firm cost basis quote from the plan for NUA purposes before deciding.
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