When withdrawing company stock from 401k plan, I believe it is possible to defer paying the capital gains tax. I do not want to do a lump sum distribution. If I only do a partial distribution, what are the applicable rules?
Greeting, cltdan, and welcome. You asked:When withdrawing company stock from 401k plan, I believe it is possible to defer paying the capital gains tax. I do not want to do a lump sum distribution. If I only do a partial distribution, what are the applicable rules?First, let's clear up a misconception you have. You will have no "capital gains tax" when taking stock from a company retirement plan. Additionally, there is no difference in the tax treatment of a partial or a full withdrawal of money you have in the 401k. Any previously untaxed money you withdraw will be taxed at your ordinary income tax rate in effect at the time of withdrawal. To avoid that tax, you may roll the money (or whole shares of company stock) to an IRA to continue the tax deferral. Let's say you want a distribution that consists soley of your shares of company stock. You have two choices. You can have those shares transferred to an IRA. That continues the tax deferral on any untaxed deposits and gain you have in those shares. Ultimately, though, you will sell them and withdraw the money from the IRA. When that happens, you will pay ordinary income taxes on the money taken. Alternatively, instead of using the IRA you can have the shares issued to you. When you receive them, you must pay ordinary income taxes on your basis (i.e., the purchase price) in those shares. No recognition of market gain occurs at that point. Later, regardless of when you sell them, all gain over your basis in the shares up to the date of transfer to you will be treated as long term capital gains. Any gain after the date of transfer will receive capital gains treatment based on the holding period since that date. Using this method, you don't avoid capital gains taxes, but you do avoid ordinary income taxes on the gain in those shares.Regards….Pixy
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