Rolling stock certificates from a 401K to a Roth IRA

[Guest Dave Blaschke]

I have stock in a 401K that I plan to take out as certificates and pay the tax on the cost basis. Here is my question: can these certificates then be rolled into a Roth IRA? I was told that this was possible by a financial advisor, but cannot believe that it is true, and for that reason, I seek independent conformation that this is a valid strategy.

[John G]

I am sure one of the accountants will give you and answer at this site. Readers of the Roth message board should also be aware that this site also has a number of other message boards that are devoted to 401K, 403B and other plans.

[BPickerCPA]

It sounds like you are talking about the NUA on company stock in a 401k. If you take the stock out as part of a lump sum distribution, you pay tax on the cost basis at the time of withdrawal and then pay cap gains on the appreciation when you sell it.

You cannot roll this stock into an IRA.

As for any other stock that is in the 401k, if you take it out you will pay tax on the value at the time of the withdrawal. Again, you cannot roll it into an IRA.

You cannot roll anything directly from a 401k to a Roth IRA. You can do a trustee to trustee transfer of the stock in a 401k to a traditional IRA, and, if eligible, then convert the same stock into a Roth IRA. You will pay tax on the value at the time it leaves the traditional IRA for the Roth.

Barry

[Gary Lesser]

The stock can be rolled over into a traditional IRA and then the traditional IRA can be converted into a Roth IRA. The NUA belongs to each share and cannot be separated from the certificate, thus any distribution of the employer securities from the IRA (or upon conversion into a Roth)will subject the stock to taxation at its FMV (thus loosing any NUA treatment that might have been available had the stock been distributed from the 401(k) plan and not rolled over). If the shares are rolled over into an IRA, then there is no tax to pay (and the NUA is lost forever). FWIW, you cannot withhold stock having a FMV equal to the total NUA and rollover the balance of the shares and other property.

[Guest MTL-CPA]

I would give a lot of consideration to the issue of whether to take the securities out and pay tax on them vs. doing a rollover IRA. Taking them out is one of the few opportunities there are to convert what is normally ordinary income into capital gains. However it is not always the perfect answer for everyone. Your analysis should take into account a number of things, some of which are (1) NUA, (2) whether you have other retirement accounts, (3) tax bracket, (4) age, etc...