Question: I heard somewhere that you can take stock out of your 401(k) and not pay taxes. Is this accurate?

A BuyandHolder

Answer:

Dear BuyandHolder,

Yes...but it all depends upon your company's particular plan and its rules.

There is, in fact, a little-known IRS ruling that lets those who own their company's stock and have it held in the company's 401(k) plan, to take it out. The procedure is known as an "in-kind distribution."

The only time this makes sense (and in some cases, the only time it is allowed) is when your shares of the company's stock have greatly appreciated in price. Then, an "in-kind distribution" enables you to get a major tax break.

The procedure: Begin by making an appointment with your 401(k) administrator. Ask if the plan permits you to take shares out, and if so, if it can be invested in your regular brokerage account. If the answer is yes, the changeover should be made from company to company.

You will wind up paying income taxes only on the value of the stock when you purchased it.

For example, let's say you paid $10,000 for the company stock several years ago. It's now worth a hefty $80,000. With an "in-kind distribution," you wind up paying income tax only on the $10,000 when you take the stock out of your 401(k). The rest of the value, the $70,000 will be taxed at the lower capital gains rate -- when and if you sell it.

For Further Information

Although they are a familiar plan, 401(k)s are complicated and individual company's rulings often confusing. One of the best sources for help, in addition to your plan's administrator is www.401khelpcenter.com.

Good luck!