Rules of Company Stock Inside a 401k
I have a client that divorced her husband. She received 50% of his 401k balance which includes company owned stock although she never worked directly for the company. The difference between her cost basis and current value is about $20,000 in gains. Can someone refresh me on the rules for transferring company stock out of 401k, versus rolling it over to an IRA, and what the process is for going about that? She is currently 53, so if we take the stock out of the plan and sell it will she avoid the 10% tax penalty and only pay capital gains?
Thank you,
T. C. Martin
Permalink Submitted by Alan - IRA critic on Thu, 2014-11-13 00:41
There are almost too many variables to cover in this particular situation. To narrow it down somewhat client should first ask the plan what her cost basis is per share as a % of the value. Then determine if the plan will allow her to take a lump sum distribution including NUA shown in Box 6 of the 1099R. If she is not eligible at this point, perhaps she will be later. And even if she is allowed to take a lump sum distribution now, the portion of the plan that goes to an IRA will not be accessible without penalty before 59.5. Distributions she takes directly from the plan will have no penalty because of the QDRO exception. There is no penalty on the LT cap gain when she sells the shares either because they would be sold in her taxable account in most situations. Anyway, to narrow down the options, she needs to talk to the plan administrator because plans have different requirements for QDRO recipients.
Permalink Submitted by Tangy Ward on Sun, 2014-11-16 18:55
What are the options for the owner of the 401k at age 54? Can the stock be moved to a brokerage account without penalty? Could it be rolled directly over into a Roth IRA? If so, would it be better to roll it into a traditional IRA first?
Permalink Submitted by Alan - IRA critic on Sun, 2014-11-16 20:11
There will be a penalty on the cost basis portion unless employee qualifies for a waiver. If employee separates from service from the sponsoring employer in the year he will reach 55 or later, the penalty is waived. If the shares are converted to a Roth IRA, amounts attributed to pre tax contributions or company matching contributions or gains will be taxable. If a direct rollover is done to a TIRA first, Roth conversions can be limited in value and managed to reduce the tax rate paid.
Permalink Submitted by Tangy Ward on Mon, 2014-11-17 18:14
Thank you for your timely response!