I read somewhere that there is an option upon retirement to rollover a 401K into a taxable account, pay ordinary income taxes on the contributions made and then get long term capital gains treatment on the remaining assets in the 401K (assuming held for more than 1 year). Does anyone know what section of the code supports this and if this is in fact the correct treatment of a rollover?
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I think you are referring to the situation where the 401K plan has employer securities that are distributed as part of the 401K distribution. The Net Unrealized Appreciation (NUA) in the securities at the time of the distribution is treated as capital gain when the securities are sold regardless of the holding period. See ยง402(e)(4). This treatment is not applicable to a "typical" 401K rollover where there are no employer securities.
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