401(k) Plan - Company Stock Dividend Distribution - What Happens if Rollover to IRA Before 59 1/2?

[G-Man]

I'm not 59 1/2-year-old yet and will officially retire in April 2025. I have been cashing out my quarterly dividends from the company stock holdings within my 401(k) without incurring a 10% early withdrawal penalty. Our 401(k) plan allows us to do that. I do realize that the dividends are taxed as ordinary income tax rate.

The question is this:
Will I be able to cash out the quarterly dividends if I rollover the company stock position in my 401(k) to a T-IRA before the age of 59 1/2 without incurring a 10% early withdrawal penalty?

I realize that if I rollover the company stock position to a T-IRA, I lose out on the Rule of 55 until I reach 59 ½ for that holding/position.

 

[iloveyoga]

It's been a while, but I think this provision/rule only applied to company stock in 401(k) plans. Not IRAs.

 

[MdaPetralia]

Will I be able to cash out the quarterly dividends if I rollover the company stock position in my 401(k) to a T-IRA before the age of 59 1/2 without incurring a 10% early withdrawal penalty?

No, as you will lose the Rule of 55 penalty protection that your 401K plan offers.

But I think you already answered your own question, right?

I realize that if I rollover the company stock position to a T-IRA, I lose out on the Rule of 55 until I reach 59 ½ for that holding/position.

Since you are rolling over only your company stock holdings, have you looked into NUA (Net Unrealized Appreciation)?

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[G-Man]

No, as you will lose the Rule of 55 penalty protection that your 401K plan offers.

But I think you already answered your own question, right?


Since you are rolling over only your company stock holdings, have you looked into NUA (Net Unrealized Appreciation)?

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I have looked at NUA. Not a huge appreciation to warrant leveraging NUA.

 

[G-Man]

Thank you everyone for responding.

In summary, if I move the company stock holding from my 401(k) to a T-IRA before 59 1/2, I will not be able to take the dividends out without incurring a 10% early withdrawal penalty. In addition, I lose the ability to execute the Rule of 55 on that company stock position.

 

[MdaPetralia]

if I move the company stock holding from my 401(k) to a T-IRA before 59 1/2, I will not be able to take the dividends out without incurring a 10% early withdrawal penalty.

Once in the T-IRA you could use rule 72(t) to avoid the 10% penalty for early withdrawal.

 

[imnontrad]

I have looked at NUA. Not a huge appreciation to warrant leveraging NUA.

Actually, you need to lok long term. When you withdraw, you pay income taxes on the cost basis only. You only pay capital gains tax on the rest when you sell the stock.
BUT it also lowers the amount in your pre-tax retirement account. That mean's smaller RMDs. Plus if that stock does take off and is in the pre-tax account, you (yourheirs) will pay regular income taxes on the whole amount.