By Andy Ives, CFP®, AIF®
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I have a large amount of stock from a previous employer in my 401(k). I had been reinvesting the dividends for the last 23 years since I left the company. I no longer want to reinvest the dividend to buy additional shares. Most of the stock has appreciated considerably since I bought it.
I am still working for another year and in a fairly high tax bracket. After I retire, I plan to take the stock out of the 401(k) to use the net unrealized appreciation strategy (NUA) to get favorable tax treatment on the appreciate stock. The 401(k) has two options for dividends from the company stock while it is still in the 401(k) plan: I can either reinvest the dividend in more company stock, or have them send me a quarterly check for the dividend amount. Will I jeopardize the favorable tax treatment if I have them send me a quarterly dividend check in years before I proceed with the NUA distribution?
If you only take the dividends from the company stock, that will not eliminate your opportunity to still leverage the NUA tax strategy in the future. While many plan transactions (like a normal distribution, in-plan conversions or even a required minimum distributions) will “activate” an NUA trigger and force you to complete the process in that same calendar year, taking only the dividends from the company stock will not jeopardize a future NUA transaction.
A client sent me this about his IRA funded with silver coins: “About 3 months ago the depository I was using went into receivership due to illegal practices. Their emails indicated I could get back a portion of my investment, so I had the coins shipped to my house. This week, I received all the coins at my home, nothing was lost in the process. I don’t really want to send it all to another depository, but I know there is a tax penalty involved. Could I put the equivalent amount of cash into my IRA and keep the silver coins and avoid the tax penalty?”
Thanks for your help,
No, your client cannot replace the silver coins with cash. Taking out coins and trying to roll over cash violates the same-property rule. If an IRA owner takes out coins, he must roll over coins. If he takes out cash, he must roll over cash. If he takes out stock, he must roll over stock. In this situation, we have a taxable distribution of coins to the IRA owner. If he is under 59 ½ and no exception applies, the 10% penalty is also a possibility. To avoid taxes and the penalty, the actual coins must be rolled over within 60 days to another custodian who will accept such a rollover.