401(k) ithat include appreciated employer stock

[Like2Plan]

I ran across an interesting article titled "Avoid These 401k Rollover Mistakes" from the Oblivious Investor.

Link to "Avoid These 401k Rollover Mistakes" from the Oblivious Investor

Here is a short quote from the article:

"Shouldn’t Have Rolled it Over
Your 401(k) includes appreciated employer stock and you want to take advantage of the “net unrealized appreciation” rules. "

I started this thread because I had a question about “net unrealized appreciation” in a 401K.

I was womdering how this worked? For example, some 401Ks have the option of receiving company stock as a match. But, since the match is not taxed when it goes into the 401K (assuming it is not a Roth type 401K), how would this net unrealized appreciation rule work when it came out?

[jpg7n16]

I think you could really benefit from reading this: Net Unrealized Appreciation Tax Strategies | Ameriprise Financial

Very good article on the discussion.

Essentially, here's my understanding of NUA in your example: The company match that goes into purchasing the company stock in the 401k - add all those amounts up. That is the "basis" if you take a shares-in-kind distribution from your plan (move the shares from the 401k to your taxable brokerage acct).

Let's say you had $5000 of company match (not taxed yet) that bought 500 shares of company stock now valued at $15,000. You can take the shares as a distribution straight to your taxable account. At distribution you would be taxed as ordinary income on the $5000 (maybe 10% penalty), but the extra $10,000 would be long term cap gains (no penalty, and only taxed when the stock is sold).


Also see: The secret tax benefit of net unrealized appreciation - Dec. 23, 2005

[Like2Plan]

I think you could really benefit from reading this: Net Unrealized Appreciation Tax Strategies | Ameriprise Financial

Very good article on the discussion.

Essentially, here's my understanding of NUA in your example: The company match that goes into purchasing the company stock in the 401k - add all those amounts up. That is the "basis" if you take a shares-in-kind distribution from your plan (move the shares from the 401k to your taxable brokerage acct).

Let's say you had $5000 of company match (not taxed yet) that bought 500 shares of company stock now valued at $15,000. You can take the shares as a distribution straight to your taxable account. At distribution you would be taxed as ordinary income on the $5000 (maybe 10% penalty), but the extra $10,000 would be long term cap gains (no penalty, and only taxed when the stock is sold).


Also see: The secret tax benefit of net unrealized appreciation - Dec. 23, 2005

That is very interesting. I did not realize the company would track the basis and differentiate between the gain and the basis. I suppose exercising this option would be pointless if the favorable long term gain tax treatment goes away in the future...

[kv968]

Here is a short quote from the article:

"Shouldn’t Have Rolled it Over
Your 401(k) includes appreciated employer stock and you want to take advantage of the “net unrealized appreciation” rules. "

I started this thread because I had a question about “net unrealized appreciation” in a 401K.

I was womdering how this worked? For example, some 401Ks have the option of receiving company stock as a match. But, since the match is not taxed when it goes into the 401K (assuming it is not a Roth type 401K), how would this net unrealized appreciation rule work when it came out?

I would think that the employer's match of stock would either have to be rolled into a traditional IRA where you would be taxed on taking it out or, if allowed to be rolled into a taxable account, your cost basis would be $0 and you'd owe taxes on all of it when you sold it. I imagine the rolling over into a traditional IRA would be the norm.

One thing you might want to check with the company stock also is the fact of do you actually own the STOCK itself. I work for a large company which offers their "stock" in the 401k but it's actually not stock but in essence a fund.

From the prospectus:
"Normally invests primarily in the stock of 'ABC Inc.', as well as in short-term investments. Your ownership is measured in units of the fund instead of shares of stock. The fund pools your money with that of other employees to buy shares of stock in your employer or its affiliate and an amount of short-term investments designed to allow you to buy or sell without the usual trade settlement period for individual stock transactions. The amount of short-term investments is based upon a target established by the plan sponsor, but the actual amount of short-term investments on any given business day will vary with the amount of cash awaiting investment and with participant activity in the fund (contributions, redemptions, exchanges, withdrawals, etc.) The value of your investment will vary depending on the performance of the company, the overall stock market, and the performance and amount of short-term investments held by the fund, less any expenses accrued against the fund."

So technically, it's almost like I don't own any "traditional stock" when purchased through my 401k. The price of the "stock" in the 401k isn't even the same as the market price. The price quoted in the 401k is basically the NAV of the stock "fund". In a situation like this I don't even know if I'd be able to roll the stock over into a taxable account like you're asking about. I'll have to look into a little more. Something to maybe check out with your 401k also. I know nearly all of my co-workers weren't aware of that fact.

[Like2Plan]

So technically, it's almost like I don't own any "traditional stock" when purchased through my 401k. The price of the "stock" in the 401k isn't even the same as the market price. The price quoted in the 401k is basically the NAV of the stock "fund". In a situation like this I don't even know if I'd be able to roll the stock over into a taxable account like you're asking about. I'll have to look into a little more. Something to maybe check out with your 401k also. I know nearly all of my co-workers weren't aware of that fact.

That is another intetesting point I'll have to look into it some more. I was thinking this would be awesome for someone in a company like a google or a facebook or a Apple (if the company had a 401K and the did the company match in company stock--assuming the stock continues to go up, of course ).

[kv968]

That is another intetesting point I'll have to look into it some more. I was thinking this would be awesome for someone in a company like a google or a facebook or a Apple (if the company had a 401K and the did the company match in company stock--assuming the stock continues to go up, of course ).

It's nice to have the option to be able to purchase company stock within the 401k but it can also be very harmful. I've helped some of my co-workers with their 401k allocations and you'd be surprised just how much company stock they hold. I've seen some with 75% or more of their 401k in it. I know of one guy who is 100%.

To tell you the truth, when I first started there I had all company stock too. However, I learned my lesson a long time ago and have come a long way since. The scary thing is, the ones holding that much aren't young people, but people who have been with company for many years and are in their mid-50's. I've talked some of them into moving some of it into something else but usually not enough. The 100% guy says he's just going to "roll the dice". Since I've tried many times to explain the risk he's taking but he won't listen, I just tell him "yes you are, yes you are".