Net Unrealized Appreciation Calculator: the facts

1. Employer stock held inside a 401(k) can be taken out of the plan in a lump-sum distribution and taxed on only what the plan paid for it; the growth, the net unrealized appreciation, is not taxed until the shares are sold, and then as long-term capital gain whatever the holding period (§ 402(e)(4)).
2. Rolled into an IRA instead, the same shares lose that treatment: every dollar, growth included, is ordinary income when withdrawn.
3. The distribution must be the whole balance of the plan within one tax year, after separation from service, age 59½, disability, or death (§ 402(e)(4)(D)); the other assets in the plan can be rolled over in the same year.
4. The cost basis taxed at distribution carries the 10 percent additional tax if the employee is under 59½, unless separation came in or after the year of turning 55 (§ 72(t)(2)(A)(v)).
5. Example: $500,000 of employer stock with a $100,000 basis, at a 32 percent ordinary rate and 15 percent on gains. Taken out with the election, the tax is $92,000 in all; rolled over and withdrawn, $160,000. The election saves $68,000.
6. The election pays when the basis is a small share of the value and the ordinary rate is well above the gains rate; with little appreciation, or a low bracket in retirement, a rollover's deferral can win instead.

Educational only, not investment, tax, or legal advice. Results are hypothetical estimates that vary with each use and over time and are not guaranteed accurate or complete. Using this tool creates no client relationship with Considerate Capital, and the site that linked here is not affiliated with it. By using it you agree to the tool terms.