In Kind Stock Distribution from 401k
I have a client that has company stock in his 401k that we are possibly looking to distribute into a taxable brokerage account. Normally we would be doing so for the NUA advantages, but the current value of the company stock is less than his cost basis. My assumption is that if he elects to do the distribution, he would pay ordinary income tax on the FMV of the stock on the date of distribution and not the higher cost basis, correct? After doing so, any future gains would be taxable at the long term capital gains rates if held for more than a year, correct?
Permalink Submitted by mk foss on Wed, 2010-03-03 05:11
You are correct, NUA is only for appreciated stock. The election is not available for stock that has depreciated over the plan’s cost. If the shares are retained, they must be held for a year and a day for long-term treatment. The holding period starts on the day the share are registered.
Permalink Submitted by Stephen Rhodes on Wed, 2010-03-03 05:37
Thanks for the quick reply. To clarify, even if the stock has depreciated over the plan’s cost it can still be distributed to a taxable account via a like kind transfer, correct?
Permalink Submitted by Alan Spross on Wed, 2010-03-03 19:38
Yes, client can distribute the shares to a taxable account, but will run into mandatory withholding issues that would not occur with NUA if cash is distributed in the same distribution. He would be taxed on the value of the shares upon distribution, and if he sold the shares in the first year, any gains after the distribution date would be taxed at the ST cap gain rate.
NUA considerations would not be applicable here even if client wanted to pay taxes on the cost basis. For example, if the cost basis was 100 per share and shares had fallen to 95 on the distribution date, but client expects them to recover quickly and wants to sell them in the first year with the LT cap gain rate, he cannot elect a negative NUA since there is no provision for the 1099R to show negative figures in the NUA box. To use NUA, there must be actual appreciation on the distribution date.
If client distributes the shares to a taxable account, the client still has 60 days to change his mind and roll them over to an IRA instead. Or he could sell them and roll over the proceeds (this is not permissible with NUA shares though).