When can I move my company stock shares out of my 401(k) to a taxable equity account?
When can I move my company stock shares out of my 401(k) to a taxable equity account? I was told I could only do this in the year I take my first required minimum distribution.
Generally you can take distributions from a 401k penalty free at age 59 1/2. If you take distributons prior to that you are subject to a 10% penalty (with some exeptions). Distributions are taxed at your oridinary income tax rate for the pre-tax contributions that you made. However, for company stock special rules apply. The difference in value between the average cost basis of shares and the current market value of the shares held in a tax-deferred account is called Net Unrealized Appreciation (NUA) is the.The NUA is only available when the stock is originally placed into a tax-deferred account, such as a 401K(k) or traditional IRA, and is only applicable to the stock of the company for which you are or were employed. When distributing stock out of a 401(k) to a taxable account, shares of the company stock will only be charged as income on the cost basis. You can find out the cost basis from your employer. Upon selling the company stock, the NUA will be subject to capital gains tax. NUA distributions depends on what the plan document says, generally: You must have either separated from the company, reached the minimum age for distribution, suffered an injury resulting in total disability, or you must have died.
Ask for a copy of the plan document to find out about the distribution requirements.
I want to make sure we’re on the same page that you’re not referring to employee stock option plans, which have different tax treatment than the 401k. If I understood you correctly, you simply want to know when you’re allowed to transfer the company stocks you have held in your 401k to a taxable account.
The answer you got that you posted as the question may not be true. You need to read the plan summary on your own or get the help from a financial planner who can interpret it for you. In many cases, I have seen eligible participants (older than 59 ½) can do things that are not normally available to other participants. As you can see, age is the key. For example, they can roll their Roth 401k to Roth IRA once they have attained age of 59 ½ even if they’re still with the same employer and continue to work.
Besides the traditional age 59 ½, another magic number is age 55. If you separate from the employer after you turn 55, you can use a favorable NUA (net unrealized appreciation) rule for your company’s stock. Essentially the NUA is the difference between your cost basis and the market value on the date you sell. It benefits people: 1) who have large amounts of highly appreciated company stock in an employer qualified plan. 2) who are willing to include a portion of their distribution in income right away, and 3) who can afford to pay tax on that distribution.
Under the NUA, you pay two different taxes when you first transfer the company’s stock to the taxable account. You pay the ordinary income tax on the cost basis, and then you pay the favorable capital gain tax on the NUA.
It can get complicated, so consult with a CFP® before make a move. Best!