Post-Enron, some individuals have been hesitant to keep large portions of their 401(k) accounts invested in company stock, fearful of seeing their retirement security evaporate. An article in this month’s issue of AARP Magazine reminds us that if stock is transferred upon distribution, then income tax is owned only on the stock’s cost basis, and subsequent stock sales are subject to lower capital gains taxes. [AARP Magazine, Jan/Feb 2006, Karen Hube, p38]
Even that favorable capital gains treatment won’t protect the individual from a crash as severe as the one that brought Enron stock down. Diversification of investments would have been the prudent course there. But for any reasonable holdings of company stock, going the capital gains route will be better than cashing out the stock within the 401(k) plan itself, even if the stock price slips some moderate amount: you’re losing less to the market than you would lose to your Uncle Sam!