10% early withdrawal penalty for selling all or part of the company co

[Guest eugenew]

I would like to know if there is a 10% early withdrawal penalty for selling all or part of your company common stock owned.

[Dave Baker]

The company stock is held by your 401(k) plan account and you'd like to have the plan sell it and then distribute to you the sales proceeds?

[jaemmons]

It depends upon when the securities are being sold, what sources were used to purchase the securities (were after-tax ee $'s used), whether the distribution is a lump-sum as outlined in IRC 402(e)(4)(B).

If the er securities are sold at or before the participant takes the distribution, then I would say yes, unless another exception under IRC 72(t) applies. If the securities are sold, after the participant takes their distribution (they received the er stock as part of their initial payout), I would say no, because at this point, the er stock has become part of personal assets and not part of a qualified retirement plan, assuming the stock wasn't transferred to an IRA account. It's at this point that long/short term capital gain rules apply and the excise taxes don't.

[david rigby]

As Dave was getting at, this question probably needs some initial clarification.

Has the participant separated from employment? If not, then there is probably not an event which would entitle a distribution from the plan. If so, then the participant is then free to use the amount distributed as desired. (If you need some ideas, then my daughter's college tuition is available.)

Perhaps instead the questioner is asking if the plan (and/or the participant?) can direct, prior to a separation of employment, that some or all of the portion invested in company stock can be sold and invested in something else? If that is the question, the answer will depend entirely on the terms of the plan. For example, does the plan give the right to switch investments? Moving money between investments is not a withdrawal hence there can be no 10% penalty. Another possibilty is that the plan specifies that all or a portion of a company match (or other company contribution) will be invested in company stock. If so, it seems unlikely that any of this could be "switched" to another investment or distributed prior to separation of employment.