Dear Dr. Don,
I have a 401(k) with a fairly large amount of stock. This stock pays quarterly dividends that equate (now) to about $1,600 per month. When I retire (planning on 4½ years from now), I would like to maintain the 401(k) and only have the dividends paid to me as income. Is this possible, or do I have to roll it over to something else? Would you recommend doing it?
— Rick Retires
The plan document determines your ability to continue holding retirement monies in the company’s 401(k) plan after you retire. The IRS Publication “401(k) Resource Guide – Plan Participants – General Distribution Rules” discusses required distributions from the account, but you need to know how your company’s plan is structured. Ask your plan administrator.
If you do have to roll over the distribution in the year you retire, be aware of how net unrealized appreciation, or NUA, of company stock held in the 401(k) will impact your decision-making process. You’ll want to treat the portion of the 401(k) invested in company stock differently than the other investments in the plan.
You should definitely consult with a tax professional before making any decisions about company stock held in your 401(k) plan, or the decision to roll assets into an IRA/Roth IRA account.
Bankrate has a stock retirement plan calculator that can help you determine the tax savings associated with NUA in your 401(k). It’s not a substitute for professional tax advice, but it provides an incentive to get that advice prior to making rollover contributions into other retirement accounts.
I’d recommend an approach that seeks to minimize the taxes paid on the company stock held in your 401(k). If that means you need to move the money out of the 401(k) plan at retirement, then that’s the approach to take. But don’t do it without professional tax advice.
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