Whats this I hear about being able to withdraw “company stock” from a 401k account and only pay taxes on the “cost basis?
This is probably the the biggest mistake people make when they cash out their 401k account. You shouldn’t automatically assume that rolling your 401k into an IRA is the best thing to do. By taking possession of your company stock and paying ordinary income taxes on the “cost basis” of the stock, gains on subsequent sales of stock (i.e., the net unrealized appreciation (NUA)) will be taxed at the capital gains rate (max=20%). If you roll over the 401k account to an IRA, any sales of company stock would be taxed at the ordinary income rate (max=39.6%). IRS Publication 575 – Pension and Annuity Income, Page 21, “Distributions of Employer Stock” details the application of this rule. Here’s an excerpt: “Distributions of employer securities. If your distribution includes securities in the employer’s corporation, these securities may have increased in value while they were in the trust. “Securities” includes stocks, bonds, registered debentures, and debentures with interest coupons attached.
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