Hi,
I buy into my company's ESOP in my 401k. As of now, the dividends re-invest in my ESOP. However, there is an option to be paid in the dividend directly and states that it is taxed as normal income(even though it is still in the 401k), i.e. that is no penalty.
Why is this taxed as normal income and not under capital gains for the dividend?
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I think you mean you get the dividends paid to you from the 401-K plan so it is considered a distribution. If so, then it will be taxed as ordinary income because all distributions from a 401-K plan are taxed as ordinary income.
Thanks for the follow up. Yes, it looks like if I elected for the distribution I take the dividend as income from my 401k even though I'm still working(I guess it is something special about the ESOP?).
If I get the distribution from my Roth 401k at 59 and 1/2 having held the Roth 401k for 5+ years, would I then receive the distribution tax free?
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