You'll pay ordinary income taxes on your basis in the stock you shift to the taxable account-that's the amount you paid for the stock-but the remaining NUA (the appreciation while the stock was in your retirement plan) will be taxed only when you sell the stock.Īnd, here's the kicker: When you sell the stock, the profit will qualify for the long-term capital gain rate. When you take a lump-sum distribution from your 401(k), you can move the stock to a taxable account and roll over the balance of the 401(k) to an IRA. (NUA) can result in significant tax savings. If you own highly-appreciated company stock, special rules for what's called Net Unrealized Appreciation You can avoid this potential problem by asking your retirement plan to send the money directly to your IRA or having them write the check to your IRA custodian. Many states assess their own taxes and penalties on top of the federal amounts. Any money that's not in an IRA within that time period will be treated as a distribution and subject to income taxes plus a 10 percent federal penalty if you are younger than age 59½. You have 60 days to get your money safely into an IRA, but you will have to come up with that 20 percent that was withheld by your employer. If you do, your employer will be required to withhold 20 percent of the balance for federal taxes. If you decide to roll over some or all of your 401(k) money to an IRA, you can preserve your tax deferral by transferring the funds directly to a new custodian, such as a broker or mutual fund company.ĭon't make the mistake of having a check made out to you. If you roll the money over to an Individual Retirement Account (IRA) you'll have more investment choices, but you must be at least age 59½ to avoid early withdrawal penalties. And if you are at least 55 when you retire, you can start tapping your 401(k) funds penalty-free (but not your IRA), although you'll still owe income taxes on your withdrawals. You might want to do that if you like the investment choices and low fees in your employer's plan. One of the first decisions you'll have to make is what to do with the savings that you have accumulated in your 401(k) or similar workplace retirement plan.Īs long as you have a balance of $5,000 or more, you can keep it with your former employer. One of the biggest changes is that instead of contributing to tax-deferred retirement savings plans that reduce your tax bill, you'll start tapping those savings to provide income and pay taxes at your regular income tax rate. When you retire, your life changes in many ways-and so do your finances. When the big day finally arrives, you’ll have to learn a whole new set of rules about: You’ve spent a lifetime saving for retirement.
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