Rules on Company Stock in a 401k Plan
Can some one please remind me the rules on how to handle a terminated employee’s company stock that he currently has inside his 401k retirement plan prior to rolling it over to an IRA? Do you have the plan issue the certificates directly to the participant? Can you also refresh me on why you handle this differently and the tax benefits associated with it?
Thank you for your contribution,
T. C. Martin
Permalink Submitted by Alan - IRA critic on Thu, 2013-05-02 18:36
The tax benefit is NUA (net unrealized appreciation). If the stock purchased for the plan has large gains over the years, the employee can transfer the shares to a taxable brokerage account instead of an IRA. Tax is due on the cost basis of the stock, but the gains are only taxed at the LT cap gain rate when the shares are sold. Other assets in the plan must be rolled to an IRA as part of a lump sum distribution in the same year. The share cost basis should be less than 30% of the current value in most cases for NUA to be a real benefit.
Permalink Submitted by Todd Martin on Wed, 2013-06-12 17:16
If the client is 58 and executes this NUA due to the appreciation of the stock, would he have to pay a 10% tax penalty due to the fact he is under age 59 1/2? I know the cost basis would be taxable but is there a penalty?
Permalink Submitted by mk foss on Wed, 2013-06-12 18:24
If the individual terminated after age 55, there is no 10% penalty. If he terminated earlier than 55 and is just taking benefits at age 58, a 10% penalty would apply to the taxable cost basis.