Cost Basis applied

[Guest ValleyRebel]

I am to get 60% of my ex's 401K plan as of August 7, 2008. That amount is 388K. My ex and I wrote the QDRO and now they have a question I can't answer.

They want me to confirm whether or not the cost basis on the Employer Stock should be applied proportionately to the Alternate Payee's Distribution?

Thanks to all.

[GBurns]

Proportionately is the fair way to do it, otherwise someone stands the chance of being whacked heavily by taxes.

[Guest ValleyRebel]

My understanding is I have to pay 20% now for early withdraw and then state taxes. I am also awarded the other 40% if he would pass before retirement.

I don't understand your response and how that is fair related to taxes.

If I say that the cost basis should not be applied do I get a larger sum or just more of a tax burden?

And thank you very much for responding so quickly

[GBurns]

I suggest that you do some research to better understand the issues. Use Google to search for "401(k) withdrawal taxes"".

A 401(k) is a tax deferred vehicle. It is not tax free.

The 20% withholding is only withheld until you file your tax return. How much you get back or how much more you owe depends on many things. It is also possible to fully forfeit the 20% and still owe taxes.

In general, taxes are owed on the increase in value of an investment. In other words the amount you made on the investment. Threfore you have to know how much was invested. The amount invested is your cost or basis. The bigger the difference the bigger the gain, the bigger the taxable amount.

So if you have no basis you would owe more taxes. It does not affect the amount you receive, but it affects the amount you will owe.

[Kevin C]

Direct distributions of Employer Stock get favorable tax treatment. The distribution gets taxed based on the basis in the stock. The gain on the stock is taxed as capital gains when you sell the stock.

The 20% required tax withholding may or may not be sufficient to cover your additional federal taxes. The federal 10% early withdrawal penalty won't apply to a distribution from a qualifed plan under a QDRO.

These rules apply to distributions from a qualifed plan. If you rollover to an IRA, they won't apply when you later withdraw funds from the IRA.

[J Simmons]

Would disproportion of the basis for ER stock be appropriate by the plan even if the QDRO specified a disproportion? The Senate Committee Report on Public Law 98-397 (the Requirement Equity Act of 1984) explained:

Under the bill, net employee contributions (together with other amounts treated as the participant's investment in the contract) are apportioned between the participant and the alternate payee under regulations prescribed by the Secretary of the Treasury. The apportionment is to be made pro rata, on the basis of the present value of all benefits of the participant under the plan and the present value of all benefits of the alternate payee under the plan (as alternate payee with respect to the participant under a qualified domestic relations order).

[Guest ValleyRebel]

Thanks to all, the cost basis sounds similiar to the profit from stock options. I appreciate all the responses. Next question and last question:

Should I adjust the award for earnings and/or losses from August 7, 2008 valuation date until date of distribution.....I should only do this if the stock has risen, otherwise I should take the 60% flat award as of August 7th

Again, thanks very much

[Guest mjb]

Thanks to all, the cost basis sounds similiar to the profit from stock options. I appreciate all the responses. Next question and last question:

Should I adjust the award for earnings and/or losses from August 7, 2008 valuation date until date of distribution.....I should only do this if the stock has risen, otherwise I should take the 60% flat award as of August 7th

Again, thanks very much

Cost basis in employer stock is generally the amount of the employer contributions at the time the stock was purchased. Cost basis is taxed as ordinary income at the taxpayer's marginal rate if the stock is not rolled over. The amount in excess of the basis is taxed as long term capital gains subject to a maximum 15% tax when the stock is sold. If the stock is rolled over to an IRA it doesnt matter what the cost basis is because the stock is is taxed as ordinary income when distributed.

There can also be cost basis if the employee made after tax contributions to purchase employer stock. After tax basis is not taxed on distribution.

There is no 20% withholding if the only amount distributed (i.e.not rolled over) is employer stock.

For more information on taxation of employer stock see instructions in irs form 4972 available at irs.gov.

[GBurns]

I do not think that any of us could or should advise you in that regard. You have to make your own determination as to what serves you best, assuming that you do have a choice.