401k Lump Sum Rollover – Should Retirees Take the Cash or Rollover to Company Stock?

If you are nearing your retirement or changing your employers, should you take the 401k cash distribution and roll it over to an IRA (individual retirement account)? Apart from that, there is another attractive option, and it is making a lump sum rollover to your company’s stock.

Lump sum rollovers to a company’s stock plan also means the tax you have to pay is deferred until you take out the cash. The only tax you have to pay is the tax on the ordinary value of the current stock price x total # of shares. Any gains in value of the stock over the longer term is tax-deferred until withdrawal. To make understanding this easier, let’s consider an example:

Imagine you are 60 years old and want to terminate employment. You have accumulated $100,000 in retirement savings in your 401k account. You have 2 options:

1) Take the $100,000 cash out and roll it over into an IRA account

2) Receive 1000 shares worth $100 each (current stock price) and immediately sell them at this price. The shares were originally bought for $38 by a fund trustee, many years ago.

Option # 1
Option #2


-> Gross Cash Out
-> 28% Federal Income Tax Bracket
-> Net Income after Taxes
-> Value of total current shares
-> Taxable Income (0.28 x $38,000)
-> 15% tax on appreciation (going up in value) of stocks (0.15 x ($100,000 – 38000))
-> Net Income after Taxes

Advantages of offering 401k Rollover to Company Stock Options

Why would a corporation offer its employees to contribute their 401k retirement contributions to a company stock plan? Well there are many reasons:

1) Since shareholders are concerned with increasing the value of the stock, so will the employees be. If employees own a portion of company stock, they too will work hard to increase shareholder value.

2) To increase the value of the shares, the employees will work harder and thus increase productivity. This will help the company better compete in its industry and create more profits.

3) To allow its employees to earn the stock gains with tax being deferred up until maturity.

4) To hire more talented and responsible employees by offering similar stock options.

5) Cash flows of the corporation can also be increased by issuing treasury shares instead of cash payments.

Problems or Challenges when offerng 401k Rollovers to Company Stock Options

1) If the company faces financial difficulty or quarterly losses, the stock price will go down. And if the stock price goes down, the employees might become disgruntled and productivity will be lowered. Some employees might even back out of the plan.

2) Finding and paying the relatively high fees of 401k vendors or administrators (trustees of 401k accounts) to administer and manage each individual employee’s 401k account.

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