Moving Company Stock From 401k to Roth IRA

Submitted by Tangy Ward on Wed, 2014-11-19 20:49

I’d like to understand the pros and cons of moving my 401k company stock into a Roth. For instance, I’m currently able to have the dividends of the stock direct deposited into my checking account. I can change this election to reinvest the dividends very easily whenever I want. Will I still have this capability?

Would it be best to convert other 401k funds to a separate Roth or is it okay to have the stock and other funds moved/converted together?

Thank you.



Submitted by Alan - IRA critic on Wed, 2014-11-19 22:22

You have several choices with the company stock.

  1. If the stock has appreciated considerably from the date if was purchased for your plan account, you might consider NUA, which allows you to pay the lower LT cap gain rate on the appreciation. You should get a cost basis quote per share to determine if this is worth considering. If you opted for NUA, the shares would be transferred to a taxable brokerage account, and the rest of your plan to a rollover IRA or Roth IRA. You must complete a lump sum distribution of the entire plan and similar plans of this employer to utilize NUA. It is possible to use NUA for just a portion of the shares and roll the rest to IRA accounts. You can mix and match.
  2. You could roll part of the stock to your Roth IRA (taxable conversion) and the rest to a TIRA (not taxable rollover). You would not want to convert too much in a single year because it would inflate your tax rate. Once your shares are in a brokerage IRA, either traditional or Roth, you can opt to have the dividends reinvested or just added to a MM fund balance. Any distributions you take from the IRA are taxable unless it is a Roth IRA. Dividends do not get the lower tax rates in an IRA.
  3. All this said, proper diversification always trumps tax benefits. Holding too much of your retirement funds in a single stock is universally discouraged because you could lose the entire amount in a matter or weeks (remember Enron, Worldcom, and Lehman Bros). 10% of your total should be the max you would consider retaining, whether in a taxable account or an IRA.
  4. You only need one Roth IRA, but if you elect NUA, you might end up with some of the plan in a taxable account, some in a TIRA and some in a Roth IRA. Again, converting the entire amount to a Roth IRA will inflate your tax bracket unless your balance is modest.
  5. If these shares are part of an ESOP plan, special rules may apply.
  6. If you have any after tax contributions in your plan, additional planning is required.
  7. As you can see your options are very complex. Many of the above options can only be exercised after you separate from service. 

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