Skip to main content
No. of Recommendations: 0
Joe Varga wrote:

In a WSJ article 9/25/98: Another option never before discussed on these boards (to my knowledge) is now possible. Evidently under IRS Code Section 402(e)(4) it is possible to take a distrbution of the entire amount and roll it into taxable account and take the taxable basis of the account. The owner of the account pays taxes on the basis (may be eligible for 5 or 10 year averaging for these taxes) The account grows like an ordinary taxable account and when securities are sold, long term capital gains taxes apply.

My point is that this relatively unknown option provides another stategy for retirement planning. I invite TMFPixy and KAT in chicagoland and all the regulars to evaluate this option. See WSJ 9/25/98 page C1.

On first blush this option has considerable advantages where the 401k has substantial capital gains, which if rolled into an IRA will be taxed as regular earnings, but would be taxed at lower rates if 402(e)(4) is taken advantage of, if I understand this right.

There's nothing new here, but be aware the procedure isn't talking about any amount that's in the 401k. It's referring to shares of company stock. The 401k participant may transfer the shares to a taxable account instead of rolling them to an IRA. On transfer to the taxable account, the owner must declare and pay taxes on the previously untaxed basis (i.e., purchase price) of that stock, but not on the gain in that stock up to the date of the transfer. Later, when the stock is sold, gain as of the date of transfer is treated as long term regardless of holding period while gain after that date is treated as long or short term depending on the holding period after the transfer.

This procedure has been available for years and is often used by those with substantial holdings in company stock at retirement when favorable capital gains taxes justify doing so. Had the shares been transferred to an IRA, all gains would have been taxed at ordinary rates. Thus, the tax impacts played an important part in the use of the procedure. With the passage of the new capital gains structure, this role becomes increasingly important.

Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.