Roll over in kind - what is my basis? - Ed Slott and Company, LLC

Submitted by DAVID MOUTNER on Wed, 2021-01-13 20:39

I have a 401K with company stock in it. I would like to do an in-kind roll-over to my brokerage account. I understand that this is a taxable event.

Generally the value of the stock at the time of the roll-over is greater than the cost basis and that cost basis then gets carried over to the brokerage account. The difference in the value of the stock at the time of roll-over minus the cost basis (as reported by the 401K) is an unrealized gain that would need to be taken in account when I eventually sell the stock in my brokerage account. So far so good.

In my case, the value of the stock is less than the cost basis in the 401K. If I do the roll-over now, will the cost basis in the brokerage account retain the cost basis as listed in the 401K or does the cost basis revert to the lower value of the stock at the time it is transferred? If it retains the cost basis from the 401K, does that mean there is an unrealized loss? Could I use this ‘loss’ to, for example, offset any gains derived from the brokerage account?

Thanks for any clarity in this matter.

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Permalink Submitted by Alan - IRA critic on Thu, 2021-01-14 00:11

You are referring to NUA (net unrealized appreciation) that you can report if you do a qualified lump sum distribution. Typically NUA is beneficial if the cost basis does not exceed 30% of the share value upon distribution from the plan. If the value of the shares are less than the cost basis, you have no NUA and the 1099R Inst indicate that the market value of the shares are stated in Boxes 1 and 2a, and no entry in Boxes 5 (unless after tax contributions were made) or 6 (NUA). Such a distribution would create immediate taxation on the current value of the shares. That value would also be your cost basis in the taxable brokerage account, and future gains would be taxable at ST rates if sold in 1 year or less or LTCG rates if sold after 1 year. This explanation assumes that the brokerage account is taxable, not an IRA and the distribution has not been rolled over.
If the brokerage account is an IRA and the shares are transferred to an IRA account, there is no current tax due and no possibility of NUA, and this is also true if there actually were gains while the shares were in the 401k.
There is no current loss to claim. Even if the distributed value was less than your after tax contributions that purchased these shares, you cannot take the misc deduction subject to 2% floor since that deduction is suspended through 2025.
If you still want to distribute the shares to a taxable brokerage account, you will only be taxed on the current value (not the cost basis), and that value per share will be the cost basis for subsequent sale of the shares.