Message Font: Serif | Sans-Serif
 
No. of Recommendations: 1
Here is a wrinkle to Roy Lewis' article on what to do with a 401K when you leave your job. Alot of companies match a portion of an employees contribution usually with company stock. Herein lies the wrinkle, of which I am not an expert, but have a basic understanding.

1. Over the life of an emplyee's participation in a 401K, the stock match has appreciated in value greatly.

2. The appriciated value is subject to long term capital gains treatment.

3. This capital gain advantage is lost if this 401K money is transfered to a traditional IRA.

Here is what can be done based on my understanding.

1. On transfer, request a distrobution of the stock match to you, transfer everything else to an IRA.

2. The 10% penelty and 20% withholding will be applied to an employees cost basis only (the total cost of the stock when the company bought the stock).

3. You now have retained the long term capital gain benifit.

Examlpe

Value of stock match at distrobution $100,000.00

cost basis at distrobution $10,000.00

10% penelty 1,000.00

20% with holding 2,000.00

appreciation subject to capital gain $90,000.00

38.9% tax on stock value from IRA $38,900.00

Capital gain tax on appreciated value $18,000.00

Total penelty and tax on cost basis $3,000.00

Savings on stategy $17,900.00

I don't claim that the numbers are without error. Consult your tax advisor before trying this. Maybe Roy Lewis can research this and comment.

Fool on
Print the post  

Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement