The Motley Fool Discussion Boards

Previous Page

Financial Planning / Foolish 401(k)s


Subject:  Re: 401K help! Date:  1/11/2013  7:33 PM
Author:  aj485 Number:  25001 of 26116

Cost basis is only really useful when accounting for capital gains. Capital gains are only meaningful when calculating taxes. In a tax-advantaged account, cost basis can be used to determine your total investment performance (capital gain or loss), but that really provides little useful value.

Sorry, but this is not completely true when it comes to 401(k) plans and employer profit sharing plans. These plans have a feature of being able to withdraw company stock with "Net Unrealized Appreciation" (NUA) and paying ordinary income tax (and any appropriate penalties) on only the basis of the stock. When the stock is sold, the profit over and above the basis will be taxed as a capital gain, rather than as ordinary income. At least for now, capital gains tax rates are generally lower than ordinary income rates, so this could result in fewer taxes being paid, especially if there is a low cost basis for the company stock.

Here's an article about the NUA process, with some advantages and some cautions: You can also read about NUA in IRS Pub 575:

Please note - if one decides they want to use the NUA method of withdrawal for company stock in their plan, the stock CANNOT be rolled over to an IRA, so this is a decision that needs to be made first, before the rollover decision.

Copyright 1996-2018 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us