Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (2) | Ignore Thread Prev Thread | Next Thread
Author: Lucian008 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121333  
Subject: 401k's and taxes Date: 9/5/2000 3:16 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
As far as i know 401k distributions are always counted as income and taxed at ordinary tax rates.

A person brought up the point that they are not and i completely disagree with him or her. They say that the section in the tax code 402(e) 4 contains a provision which allows distibutions to be taxed at capital gains rates.

I read the 402(e) section and it talks about employer stock held in a trust which, if elected to be taken out, is added on to income. After this is done the stock grows tax deferred and is only taxed at CAP GAINs rates. I agree with this. It is just like purchasing stock from the stock market and but youre buying your employers stock with after tax dollars. Same thing applies to 402(e).

It is not a 401k but if the employer stock was held inside the 401k the distributions will be taxed at regular income tax rates.

I do not know of any way that a DEDUCTIBLE 401k can grow tax deferred and at the END or Retirement be taken out and given prefferential CAP GAINS treatment. If I am wrong please advise.

An example would be putting 10000k in a 401k (buying employer stock)for 30 years and then at the end take the money out in a lump sum distribution which at that time lets say was 3,000,000. Now the basis gets taxed at ordinary income tax rates which is the 300000. then the rest or the 2.7 million gets taxed at cap gains rates? This does not sound like it would be allowed by the government but i could be wrong.
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39586 of 121333
Subject: Re: 401k's and taxes Date: 9/5/2000 8:12 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
<<As far as i know 401k distributions are always counted as income and taxed at ordinary tax rates.>>

That's a reasonable statement...it's not completely correct in that you might be able to take a stock distribution from the 401k account that may relate to capital gains in the future.

<<A person brought up the point that they are not and i completely disagree with him or her. They say that the section in the tax code 402(e) 4 contains a provision which allows distibutions to be taxed at capital gains rates.>>

Potentially yes. If the 401k is invested in the stock of the company for which you work...and then that stock is distributed to you.

<<I read the 402(e) section and it talks about employer stock held in a trust which, if elected to be taken out, is added on to income. After this is done the stock grows tax deferred and is only taxed at CAP GAINs rates. I agree with this. It is just like purchasing stock from the stock market and but youre buying your employers stock with after tax dollars. Same thing applies to 402(e). >>

Basically correct. I've written about this in the Taxes FAQ area (I think). If not, I know that TMF Pixy has a number of articles on this very issue in the Personal Finance/Retirement section of the Fool. You might want to check it out.

<<I do not know of any way that a DEDUCTIBLE 401k can grow tax deferred and at the END or Retirement be taken out and given prefferential CAP GAINS treatment. If I am wrong please advise.>>

It's certainly possible. Do a search for Pixy's article and you'll find out EXACTLY how it works. Do a search of the fool and use the terms like "401k" and "capital gains". You'll be amazed what you come up with. If you have any trouble finding the article, or getting your arms around the concept, let us know by giving us a follow-up post right here in the Tax Strategies folder.

TMF Taxes
Roy

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (2) | Ignore Thread Prev Thread | Next Thread
Advertisement