“in kind” distribution of company stock
I have left my company after 20 years and have a large sum in my company 401k. I am 49 years old. I have a subtantial amount of long term capital loss carry over from previous market losses (in taxable accounts), that I can use to offset any capital gains taxes.
Half of the funds in my company 401k went to purchase company stock (employer match), and I purchased company stock and stable value funds in my 401k with the balance of the funds, over those 20 years. The entire balance (company match included) is now invested in a stable value fund in the company’s 401k.
My questions are:
If I switch my funds from the stable value fund in the 401k back to the company stock, will my company stock cost basis be the average of what I bought and sold the company stock for over those 20 years, or will the cost basis become the most recent stock price that I purchased?
Now, assuming that the company can figure out my company stock cost basis, I take possession of my company stock and sell it in a regular account.
I know that I will be subject to the 10% tax penalty if I take the distribution before age 55. Will I be able to include the company stock gain as a capital gain on my income tax return? If so, I have enough losses that I should be able to write off the entire gain and therefore pay no taxes on the distribution.
Last, how would the cost basis of my company stock be treated if I took possession of my company stock in the 401K? Assuming I took an “in kind” distribution, Is the cost basis of my company stock treated as ordinary income or is it treated as a capital gain as well, when I sell the stock?
I am assuming all of this is still possible even though I was severanced from the company last year.
Thank you,
Brian
Permalink Submitted by Alan Spross on Tue, 2010-02-09 18:54
You are referring to NUA, which can be taxed at the lower LT cap gain rate after a qualified lump sum distribution from the plan in which the employer shares are distributed to a brokerage account.
Unfortuneately, the sale of the company shares in the plan erased any NUA you had built up over the years, and you cannot reinstate the lower cost basis by re purchasing the shares. Repurchased shares will have a cost basis equal to the re purchase price, and lacking a huge rally in the share price, you would have a high percentage of ordinary income subject to the early withdrawal penalty and a relatively low amount of NUA per share.
Otherwise, you could take a lump sum distribution and sell the shares in a taxable account, report the sale on Sch D and offset the LTCG by your loss carryover. But if you repurchased the shares, you will not have any NUA to start with, and probably a lengthy waiting period for enough appreciation to take place.
NUA is complicated, but if you want further information, the following link will provide further info:
http://spwfe.fpanet.org:10005/public/Unclassified%20Records/FPA%20Journa…
Permalink Submitted by brian ferguson on Tue, 2010-02-09 20:07
Alan-Oniras,
Thank you so much for your reply. I read the information you provided on the link and I have decided to hold off on rolling the funds from the 401k into an IRA account. My plan is to puchase the company shares in my 401k at the new cost basis and hold on to the shares for 5-10 years. This way I can avoid the 10% early withdrawl penalty and hopefully, at some point after 5 years, when my NUA approaches my LTCL carry over (around 200k), I can use the NUA strategy. At that point, like you said, I would pay ordinary income tax on my cost basis (current amount), however, I would pay no taxes on my LTCG’s from the company stock appreciation.
All this assumes that my company stock (Pfizer), will increase in value over the next 5-10 years.
Other than the risk of holding the majority of my funds in my company stock, what do you think of this plan?
Thanks,
Brian
Permalink Submitted by Alan Spross on Tue, 2010-02-09 20:30
Diversification is still the top priority, but Pfizer is probably safer than most companies in that respect. Your plan is OK and you are protected by your losses even if LT CG rates rise above 15% when your sell the NUA shares. If something happens with the company, you can always move to sell the shares in the plan again.
To have qualified LSD, you must not take ANY distributions from the plan between your last triggering event and the LSD year. You get a new triggering event by hitting age 59.5, so if you had to take distributions before then, your ability for a qualified LSD is reinstated at age 59.5. After that, you would need to be sure not to take any plan distributions until the year of your LSD.
Usually, the LSD involves doing a direct rollover of plan assets other than the NUA shares to an IRA, but you can elect to include some of the company shares in the IRA rollover if you don’t want to use all of them for NUA, or you could sell some of then again if you feel you have too much company stock. Note that if Pfizer spins off any companies in the interim, those shares are also eligible for NUA because their source was Pfizer. The plan adminsistrator must keep track of the cost basis of any shares eligible for NUA, and you should be able to get a cost basis quote before making your decision.
Permalink Submitted by brian ferguson on Tue, 2010-02-09 22:52
Alan-Oniras,
Great information.
Thank you again,
Brian