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Hello all :

I used to work for Nortel Networks and have about $35K in the form of NT stock in my 401K the cost basis for which is around $7K.

Now i read at the Vanguard retirement resource center that as regards stock in a 401K, it is better to move the money to a taxable account. More so with stocks whose value has greatly appreciated ( as NT has ). The article goes on to say that when one moves the stock from the 401K to a taxable account, then one owes taxes only on the cost basis ( average buying price of the stock ) and the rest ONLY when u sell the stock and that will be long-term capital gains at 20%.
As opposed to that, if u move your money to the new IRA, when retiring u will be taxed on the ENTIRE amount at upto 39.6%. They even have calculations to show that this strategy works.

If people are interested I can copy ( verbatim ) the brochure from Vanguard and post it here for everyone's benefit.


Now my questions are :
1) Is this a foolish thing to do ?

2) And also when I called up my 401K administrator at NT, the lady said that I will have to pay a 10% penalty since i was getting out of my 401K before I was 59 1/2.
Is this true ? The Vanguard article dd not say anything about penalties.

I am 27 years old and have a long way to go before i retire. So any foolish advice, suggestions and comments are welcome. TIA.

Vasu
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No. of Recommendations: 1
Greetings, Vasu, and welcome. You wrote:

<<I used to work for Nortel Networks and have about $35K in the form of NT stock in my 401K the cost basis for which is around $7K.

Now i read at the Vanguard retirement resource center that as regards stock in a 401K, it is better to move the money to a taxable account. More so with stocks whose value has greatly appreciated ( as NT has ). The article goes on to say that when one moves the stock from the 401K to a taxable account, then one owes taxes only on the cost basis ( average buying price of the stock ) and the rest ONLY when u sell the stock and that will be long-term capital gains at 20%.
As opposed to that, if u move your money to the new IRA, when retiring u will be taxed on the ENTIRE amount at upto 39.6%. They even have calculations to show that this strategy works.

If people are interested I can copy ( verbatim ) the brochure from Vanguard and post it here for everyone's benefit.


Now my questions are :
1) Is this a foolish thing to do ?

2) And also when I called up my 401K administrator at NT, the lady said that I will have to pay a 10% penalty since i was getting out of my 401K before I was 59 1/2.
Is this true ? The Vanguard article dd not say anything about penalties.>>


Yes, if you take the stock while you are younger than age 59 1/2, then you will have to pay income taxes and a 10% penalty on the stock's basis. That may or may not be a good move depending on how you view the future potential of the company. Only you can decide that and run some numbers to see. You will find further details on this issue in my article "Taking Stock" at http://www.fool.com/retirement/manageretirement/manageretirement4.htm.

Regards..Pixy
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