dividends paid from 401k
Plan administrator of 401K plan that my client (age 45) has at an old employer told him that he can receive dividend checks paid to him [b]directly[/b] (not to a money market in the plan) that are paid from company stock owned inside the 401K plan and that these dividend checks are not subject to an early distribution penalty.
Is this correct?
Further the custodian said he can also roll company stock into an IRA (he was asked if he was referrring to NUA and said that he was not). I thought rollovers from 401k’s to IRAs had to be done by liquidating the investments in the 401K and then rolling the cash over.
Thanks
Howard
Permalink Submitted by Alan Spross on Sat, 2007-10-13 02:00
Howard,
No, in kind transfers can be made from the employer plan to the IRA. There might be a few cases where the IRA custodian does not maintain a market for certain issues, and those must be sold prior to the transfer, but publicly traded stocks can be transferred in kind to either an IRA or to a taxable account if desired.
If there is NUA potential, the company shares selected must transfer to a taxable account. If they are ever deposited into an IRA, NUA potential is irrevocably forfeited.
The dividends you refer to are probably from ESOP shares that were made a part of the 401k. ESOP dividends are not eligible for the lower qualified dividend tax rate, but they do escape the early withdrawal penalty. NUA can typically be applied to both ESOP shares and other company shares in the plan, perhaps from a 401k matching contribution or employee investment selection.
Permalink Submitted by Howard Hook on Sat, 2007-10-13 14:38
Alan,
Thank you as always.
I guess I have never seen where the shares have been transferred to the rollover IRA. Most rollover forms I have seen do not give the participant that option.
Howard