Posted on March 22, 2006 at 19:51:25:
When you leave a job or retire, it’s accepted wisdom that the best choice is to roll over the contents of a 401(k) or similar retirement plan into an IRA, maintaining tax deferral while increasing control over the funds. Not necessarily.
If your account includes some employer stock, you may be better off taking out those shares instead. At that point, you will owe tax on your basis on the stock, the tax cost rather than the full market value. The difference between the two is the net-unrealized-appreciation, and that won’t be taxable until the shares are sold. And when they are sold, the gain will be taxable at the 15-percent capital gains rate, rather than the ordinary income rates that apply to IRA withdrawals.
This NUA option is only allowed if the employee takes a lump-sum distribution from the employer-sponsored plan within a single calendar year. Any non-stock funds can be rolled over into an IRA.