Advanced Underwriting Consultants

Ask the Experts – June 11, 2014

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: My client received a distribution from his 401(k) plan. The distribution was comprised mostly of stocks and bonds which he sold shortly after the distribution. Can he still roll the proceeds over to an IRA if he’s still within the 60-day period, or does selling the distributed property preempt him from completing the rollover?

Answer: Your client may complete the rollover as long as the 60-day period has not expired even though he sold the distributed property.

When the property is distributed, the participant’s basis in the property is generally equal to its fair market value. If the participant sells the distributed property for a gain within the 60-day period, he may still complete the rollover and contribute all of the proceeds from the sale to his IRA. Additionally, no gain (or loss, if applicable) will be recognized if he completes the rollover.

For example, let’s say your client took a complete distribution from his 401(k) plan, which consisted of various stocks worth $300,000. Assume he holds on to the distributed property for 45 days, and the stock value increased to $310,000 in total. Your client then liquidates the stock for $310,000, resulting in a $10,000 gain. Under this situation, your client may still roll over the $310,000 cash proceeds from the sale of the stocks. Additionally, if he rolls over the full amount, he will not have to pay taxes on the gain portion until he withdraws the funds from the IRA.

Sources: I.R.C. § 402(c)(6).

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.