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has anybody heard about new laws dealing with 401K relating to the cost basis of your company stock in the plan is where you cash the fund in.

example, I work for a public company and have 500K in my 401K, half company stock and half in a index fund. I heard from my father (an employee of a public company considering this option). that tax cost basis for the company stock is where you roll it over at, while the cost basis for money invested in the funds is where you invested at.

I have never heard of this before, anybody else?
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This is not a new rule. The general rule is that you get no basis in your 401(k) investments - therefore the entire amount is taxable when you take a distribution (assuming no rollover). Employer stock gives you a break - assuming your employer stock qualifies (see your summary plan description) you get the distribution of employer stock free of tax - plus you get the plan's cost basis as your cost basis. When you eventually sell the difference between the basis and the sales price is capital gain (plus you never have to include the basis).
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The rules and tax liabilities are as follows:
If the plan allows you to withdraw the portion in stock they should tell you the cost basis. When you receive (or roll over) the stock your tax liability (as regular income) is the cost basis of the stock.
You do not pay taxes on the value of the stock when you receive it (unless you elect to). This is called the net unrealized amount (NUA).
If you sell the stock the difference between the cost basis and the value of the stock when you received it is subject to LTCG.
If the stock appreciates (or declines) after you receive it THAT appreciation (or reduction) is either long term or short term depending on how long you held the stock after receiving it.
If you instruct the plan to sell the stock and send you the funds that amount is subject to regular taxes and none of the above applies.
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