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Telone writes:

<<Pixy: thx for shedding some more light on this issue. I have about $200,000 in company stock at a cost basis of about $78,000 in my 401K with a total of about $525,000. I am 65 and have retired from the company. The 401K still is in the hands of the company but managed for them by Fidelity. I have not rolled the 401K to a self-directed IRA yet. Question: What exactly is the procedure for "removing" or extricating the stock portion ($200,000) from the total 401K (balance of $300,000 is in Fidelity mutual funds) before rolling over the $300,000 into a self-directed IRA.>>

To get the shares, you ask for them to be sent to you when the account is liquidated. The company will send you only whole shares. Partial shares will be redeemed for cash and should move to an IRA with the other assets. Also, be aware that some plans might not let you have them. Instead, the company will redeem them at market. That's up to the plan.

<<Is this procedure always the best thing to do or are there any downsides?>>

Always is too strong a word. There are always some downsides. For instance, that $78K will put you into a higher bracket most likely, which means a bigger bill. That's why it's necessary to run some numbers before making the choice.

<<Do I understand that once the stock portion is removed form the 401K that I would have to pay ordinary taxes on the $78,000, then capital gains (20%) on any future stock sales?>>

Yes, that's correct.

<< On future stock sales, what would be the cost basis for the gains?>>

That gets hairy. The Net Unrealized Appreciation (NUA) will always be taxed as long-term gains. Any additional gain above that gets taxed at long or short-term rates based on your holding period after they were distributed. So your basis is what you paid income taxes on at distribution. Your total gain would be your Selling Price less Basis. From total gain, subtract NUA to get the future gain. The latter then gets taxed based on your holding period while the NUA gets taxed at long term rates.

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