Rollover, Pay Tax or NUA?
When its time to retire or leave your current employer, there are three basic
options for your 401k distribution:
- you can rollover the balance to an IRA,
- you can pay tax today or
- you can exercise the NUA rules if they apply
Rollover
If you are retiring from your current job and want to see your 401k distribution
continue to grow tax sheltered, place the distribution in an IRA. The best
way to handle this is you have the plan administrator at your company send
the 401k distribution directly to your IRA custodian. This will eliminate the
requirement for any withholding tax, mistakes or complications.
Pay the Tax
This is the worst alternative and would only apply if you need to spend your
401k distribution, if for example, you plan to buy a yacht and sale the seven
seas.
Net Unrealized Appreciation (NUA)
One important point to remember for those who have employer stock in their
401k plans is the NUA (net unrealized appreciation) rule, which allows you
to sell your employer stock in a separate transaction that could be taxed largely
as a capital gain instead of ordinary income. If you plan on selling the employer
stock separately, be certain not to include it when you roll over the balance
to your IRA. You will separate your 401k distribution into employer stock and
the other assets to be rolled over.
We cover all of these issues and much more about 401k distributions, 401k
rollovers, 401k investments and 401k taxes in these articles:
401k
Investment
Manage Your Investment Holdings - Tax Efficiently
401k Plan
The Cost After Retirement
401k
Retirement
Movning Money from Your 401k Plan
Roth 401k
Do
You Have Time to Use this Option?
401k
Rollover
Roll Your 401k Directly Into a Roth IRA
401k Tax
Minimization
Net Unrealized Appreciation Tax Break on Employer Stocks
401k
Withdrawal
How to Get at Your Assets Prior to Retirement
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