rolling over Company Stock out of 401k to IRA

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jazman12
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Joined: Tue Jan 26, 2016 4:38 pm

rolling over Company Stock out of 401k to IRA

Post by jazman12 » Tue May 15, 2018 10:46 am

I am about to roll over my 401k assets into an IRA as I am about to retire. However, my 401k includes a significant amount of publically traded company stock (6 figures)that has appreciated over the years. I understand that if I roll over the stock into the IRA then I would pay ordinary income taxes on the distributions if I had not yet paid taxes on the account. If I do not roll the stock into the IRA but instead transfer it into my taxable brokerage account, I can avoid the stocks net unrealized appreciation (NUA) so the only part of the company stock subject to ordinary income taxes is the value is the value of the stock was when it was first acquired by the 401k plan. So because of this tax treatment, is it more beneficial to pay taxes on the stock appreciation now rather than later.
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Silk McCue
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Joined: Thu Feb 25, 2016 7:11 pm

Re: rolling over Company Stock out of 401k to IRA

Post by Silk McCue » Tue May 15, 2018 11:29 am

It is very likely that paying taxes now is much better than later. if you have seen significant appreciation in the stock since it was acquired you will save on taxes and avoid RMD's in the future. You will certainly want to run the numbers in order to appreciate how the transaction will impact your taxes this year. You wouldn't want to be blind-sided by unseen surprises.

The link below is a very thorough article on the subject.

https://www.investopedia.com/articles/r ... 062305.asp

Cheers

BigJohn
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Joined: Wed Apr 02, 2014 11:27 pm

Re: rolling over Company Stock out of 401k to IRA

Post by BigJohn » Tue May 15, 2018 5:10 pm

I did an NUA distribution of highly appreciated company stock. To me it’s more about expected tax rates than now vs later.

If you roll into an IRA, the entire value will be taxed as ordinary income. The key question is do, you expect to be in the 15% tax bracket or the 30+% bracket? If in the 15% bracket there may not be much benefit to NUA. If in the 30+% bracket, NUA can save a significant chunk of $$$ on taxes.

If you distribute as NUA, you’ll pay taxes on the cost basis all in one year. Will this bump you into a much higher tax bracket? Remember, it’s not all or nothing, you can distribute lower cost shares via NUA and rollover the rest. The advice I’ve seen is to only consider NUA on shares with cost basis no more than 40-50%. Once those taxes are paid, the capital gains at distribution are considered long term and taxed at 15%, maybe 20% if your income is high enough.

So it’s complicated and very dependent on your situation and retirement plan.

A few notes of caution....

NUA usually results in (or continues) a concentrated position in a single stock. This brings additional risk which might argue for less NUA distribution. It would also argue for selling and diversifying and shares rolled into an IRA since there would be no immediate tax consequences.

The NUA gain component is not eligible for a step-up basis to your spouse or heirs. Not the end of the world but important to know. For this reason, NUA stock makes a great vehicle for making your charitable contributions in retirement.

There are four very specific condition which are required by the IRS to get NUA treatment. Be 100% sure you meet them all. See this post for details viewtopic.php?p=3568704#p3568704

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