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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.


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.

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