Word: iras
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Dates: during 2000-2009
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...once obscure tax strategy that makes the most of your 401(k) dollars is going mainstream. The move keys on an IRS provision that lets you take possession of company stock in your 401(k) plan instead of rolling it into a traditional IRA when you change jobs or retire. The resulting savings can be staggering, and thanks to the crush of corporations that juice employee retirement accounts with their own shares these days, more people than ever stand to benefit...
...provision is not new. But word has spread slowly, largely because companies avoid dispensing anything that approaches individual tax advice and there's nothing in it for the IRA industry. But financial planners I've spoken with endorse the strategy with such vigor that you have to worry about hype. This isn't a no-brainer. And the pitfalls include the risk that you'll wind up overly concentrated in one stock. You also have to pay a tax up front...
...this time you've contributed diligently to a plan--especially if your employer matches all or part of your contribution--you could easily have $750,000 or more at retirement. It's the appreciation in the company shares that matters. "We see it all the time," says Joanne Carter, IRA product manager at PaineWebber. "That's why dealing with company stock is a big issue...
...standard advice is to roll all 401(k) assets into a traditional IRA, thus avoiding any taxable distribution while gaining total control over your nest egg. In the long run, though, all such IRA money gets taxed as ordinary income, at rates up to 39.6%. By stripping out the employer shares and placing them in a taxable account, you change the math dramatically. There's an up-front tax hit: the "cost basis" of the employer shares--the amount the plan paid--gets taxed as ordinary income. But the increase in value isn't taxed until you sell the shares...