Net Unrealized Appreciation - tp under 59 1/2

[susieq]

Taxpayer is 49. Left employer in 12/06. Has company stock in 401K worth $370,000. with cost basis of $46,000. (her contribution) Wants to roll 401K to IRA but will take advantage of NUA and sell stock and put proceeds into a taxable account.

It is my understanding that $324M will be taxed at LTCG rates and the $46M will be taxed at Ordinary rates.

What about the 10% penalty for withdrawal under 59 1/2? Is there anything else I should know about this?

[Brad Imsdahl]

I'm not sure whether you are asking about rolling it over to an IRA and taking LTCG treatment on the NUA. You can't do both. If it gets rolled over to an IRA, you lose LTCG treatment. If you don't roll it over and have the stock from the 401(k) distributed and held in an after tax brokerage account, then you pay ordinary tax on the $46,000, plus 10% penalty if applicable. I'm not sure how long it has to be held in the brokerage account after it is distributed from the 401(k), but then once it is safe to sell the stock, the $324,000 would get LTCG treatment and no 10% penalty.