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Recently, I was exploring the alternatives for treating taxes on company stock upon liquidation of a 401(k). I found out that I had the option to pay oridnary income tax on the trustee basis of the company stock in my 401(k)at the time that I liquidate the 401(k), and that I would pay long term capital gains tax when I sell the company stock. Since I am only 52, I'd also have to pay a 10% penalty on the trustee basis at the time of liquidation.

Yesterday, I was told of a variation that sounds almost too good to be true, and I am looking for validation from the Fools on the discussion board.

Upon liquidation, I would transfer a number of shares of the company stock to an IRA to satisfy the trustee basis value and end up owing no immediate tax. Let me illustrate with an example to make this clearer than the words:

I own 100 shares of my company's stock in my 401(k). It has a trustee basis of $10 per share. So, I have a trustee value of 100 shares X $10 per share or $1000. The current FMV of the stock is $50.00. So, I transfer 20 shares ($1000/$50 per share) to an IRA to satisfy the tax requirement.

Allegedly, this course has no 10% tax penalty, and no ordinary income tax at the time of liquidation. Of course when the stock is sold and comes out of the IRA I have to pay ordinary income tax on all of it.

Is this possible?

Looking forward to your input.
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