A friend of mine separated from employment where he had a 401(k). Over the years, he purchased his employer's stock with contributions deferred from each paycheck. His employer also made matching contributions and those funds were used to purchase the employer's stock as well. Employer contributions were not taxed at the time the contribution was made. Due to the separation, he now needs to take out the money from his 401(k). He decided to retire, so he is considering rolling over to an IRA. He heard about the NUA and the option to distribute the employer stock to a taxable brokerage and pay tax only on the contribution he made (cost basis), in the year of distribution. He is confused however on the employer contribution that was used to purchase the stock. The stock has appreciated substantially over the decades that he worked. He found the below paragraph in 2024 IRS publication 575, page 16, and worried he may have to pay tax on a substantial amount if he distributed the stock to a taxable brokerage account (his contributions plus the market value of the employer's contributions). He was born after 1936 and intends to distribute/rollover the entire 401(k) account.
Although the title for 2024 publication 575 says "pensions and annuity income", Page 16 Distributions of Employer Securities says "Qualified retirement plans," and his 401(k) is a qualified retirement plan. Here's the formula on Page 16, to figure the cost basis when employer contribution is involved:
Your basis in the employer securities is the total of the following amounts.
• Your contributions to the plan that are attributable to the securities.
• Your employer's contributions that were taxed as ordinary income in the year the securities were distributed.
• Your NUA in the securities that is attributable to employer contributions and taxed as ordinary income in the year the securities were distributed.
Please help clarify if this is the correct way to figure taxable amount if the stock is distributed lump-sum/non-periodic distribution to a taxable brokerage account.
Thank you
