Favorable treatment for company stock
Is any of your 401(k) invested in company stock? Tread carefully. Here are a couple scenarios:
- You leave the plan and roll your stock into an IRA. If you choose this option, you'll pay no tax when you move your investments into an IRA if you do a trustee-to-trustee transfer. But when you take the money out at retirement, all of it will be taxed at income tax rates (which could be nearly twice as high as capital gains rates).
- You leave the plan and roll your stock into a brokerage account, or you stay in the plan and take your lump sum distribution at retirement. In either case, you move all the company stock from your 401(k) into a non-IRA taxable account. When you pay that year's taxes, you'll owe income tax on the total that you actually paid for the stock. But when you take money out of the account at retirement, you'll pay tax on your earnings at capital gains rates (typically less than the income tax rate).
Best move: Consult a knowledgeable, unbiased professional who understands "net unrealized appreciation" if your decision involves company stock, says Slott.