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Question: Having reached the age of 65, my father is being forced to close his 401k from a company he worked at years ago, we have less than 30 days to determine the best course of action and I have been trying to crunch the numbers. Anyway, the 401k has both a cash portion and a stock portion, the stock has appreciated greatly in value since it was purchased, how do I calculate what the cost basis was on the stock, since it was purchased at prices over the years varying from 20 to 80?
He is planning to rollover the money to an IRA, but we also need to figure if it is better to pay the taxes on the appreciated stock now or roll that over as well.
I was able to follow the example in the 'managing your retirement --taking stock' article here but I need more detailed help

Thanks
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Greetings, imalonghorn, and welcome. You wrote:

Question: Having reached the age of 65, my father is being forced to close his 401k from a company he worked at years ago, we have less than 30 days to determine the best course of action and I have been trying to crunch the numbers. Anyway, the 401k has both a cash portion and a stock portion, the stock has appreciated greatly in value since it was purchased, how do I calculate what the cost basis was on the stock, since it was purchased at prices over the years varying from 20 to 80?
He is planning to rollover the money to an IRA, but we also need to figure if it is better to pay the taxes on the appreciated stock now or roll that over as well.
I was able to follow the example in the 'managing your retirement --taking stock' article here but I need more detailed help


The basis for the company stock he holds in that plan should be furnished to you by the plan administrator. Unless your dad kept track of the information through the years, that will be your only source for that data.

Also, be aware there may be another option for your dad as opposed to putting anything in an IRA. If your dad receives a lump-sum distribution and was born before 1936, he may be able to elect an optional method of figuring the tax on the distribution. The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. The part from participation after 1973 (and any part from participation before 1974 that he does not report as capital gain) is ordinary income. He may be able to use a 10-year income averaging tax option on the ordinary income part to lessen his overall income tax burden. A lump-sum distribution is the distribution or payment of all defined contribution plan balances (within a single tax year) he has with that employer (i.e., profit-sharing, ESOP, money purchase). See IRS Publication 575 (Pension and Annuity Income) for details. It's available at http://www.irs.ustreas.gov/forms_pubs/pubs.html.

Regards..Pixy
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As a supplement to TMFPixy's excellent reply, you also have the option of rolling over just the cash portion of the 401k into an IRA and taking an "in kind" distribution of the stock whereby you father would be taxed on the cost basis of the stock (as provided by the company plan administrator)in the year of distribution. If he needs to sell stock at a later time, he would be taxed at the capital gain rate.
Found this approach beneficial with my 401k. Good luck --- gopete
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"in kind" distribution of the stock whereby you father would be taxed on the cost basis of the stock (as provided by the company plan administrator)in the year of distribution. If he needs to sell stock at a later time, he would be taxed at the capital gain rate

"in-kind" distribution is the way to go that way you dramtically reduce your tax bite. great advice gopete i second it

Tom Greeves, CFP
a.k.a SpyontheWise
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Excellent response, Pixy:
Also, be aware there may be another option for your dad as opposed to putting
anything in an IRA. If your dad receives a lump-sum distribution and was born
before 1936, he may be able to elect an optional method of figuring the tax on the
distribution. The part from active participation in the plan before 1974 may qualify
as capital gain subject to a 20% tax rate. The part from participation after 1973
(and any part from participation before 1974 that he does not report as capital gain)
is ordinary income. He may be able to use a 10-year income averaging tax option
on the ordinary income part to lessen his overall income tax burden. A lump-sum
distribution is the distribution or payment of all defined contribution plan balances
(within a single tax year) he has with that employer (i.e., profit-sharing, ESOP,
money purchase). See IRS Publication 575 (Pension and Annuity Income) for
details. It's available at http://www.irs.ustreas.gov/forms_pubs/pubs.html.

Regards..Pixy


I might add that if he has more than one plan, he can use Form 4972 separately for each plan (don't add them all together). Also he does not have to distribute *all* the different plans, but he can't use the 4972 again in a future year for another plan, and he must take everything in all that employer's plans of the type he is distributing.
For instance, he could 4972 his 401K (profit sharing), but take his pension monthly, and take different employer's 401k on a separate 4972. The cash amount on the 4972 exlcudes the NUA of the employer stock--if he takes it as stock.

The above statements would seem to conflict with a quick reading of the 4972 instructions until you carefully note what a *plan* is and what a *plan participant* is (and isn't), and why they used that term instead of "person", "taxpayer", "employee" or "YOU". Also, he can't roll a plan's funds over (before or after or at the same time) into an IRA or other tax deferred plan.

The tax rates are very favorable, compared to ordinary income tax rates, on plans up to a couple of hundred thou, and even to 1/2 mil if you're in the 39.6% bracket. You figure the tax on 4972 and add it to your 1040 tax. The income is NOT included with other income to create phase-outs, credit limitations, medical and 2% deductions on Sched A, AMT, etc.
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