Highly appreciated stock in 401(K)
Some of this stock is very highly appreciated company stock and was in the 401(k). I segregated the mutual fund portion in and IRA and put the company stock in a seperate NON- IRA account( I believe I have 60 days to do something) waiting on cost basis information of different shares. On the portion of shares that have seen little appreciation and that the client may not want to pay taxes on the basis should we put those back into the IRA for now?
Also, They also still in have some shares in the old plan in the Companys ESPP. I assume we need to move these shares also into the non- retirement account. I believe these are bought after tax?,should the client check with old employer anyway to verify?
Thanks
Permalink Submitted by Alan Spross on Thu, 2009-07-02 20:01
There are some misconceptions here.
It is correct that you can roll over the employer shares in kind to complete an indirect rollover within 60 days of the distribution IF it is determined that NUA on those shares will not be of benefit. However, all the shares now in the taxable account are considered to have the same average cost basis for NUA purposes. Therefore, the option now is just to determine what that cost basis is and then to determine how many shares to retain for NUA purposes vrs rolling them to an IRA. NUA shares permanently lose the NUA option once they are contributed to an IRA, even for only a day. Once contributed, if they are later distributed from the IRA in kind, they are no longer NUA shares, but will have a tax cost basis equal to their fair market value on the date of IRA distribution.
Note that some plans do keep records of employer stock with different cost bases when purchased by the plan. In those cases, an employee can ask the plan to sell the higher basis shares in the plan prior to distribution, and that will reduce the taxable cost basis of the remaining shares distributed. But once the shares are distributed, those shares all have the same average cost basis. Usually, it is best to get a cost basis quote from the plan and details about employer cost lots before ordering the distribution. NUA is not particularly viable if the cost basis exceeds 30% of the FMV at distribution unless the client intends to sell the NUA shares right away.
With respect to ESPP shares, you are correct that they are after tax and cannot go into an IRA or qualify for NUA. It is also wise to document the cost basis for those shares upon distribution to avoid a messy research project down the road when they are sold.