I recently changed employment and have securities in my former employer's 401(k) plan.

The cash component of the 401(k) I am rolling over into an SEP-IRA.

What I need advice on is whether I should also rollover the securities in the 401(k) plan.

The issue is that taking money (eventually) out of the 401(k) plan will be taxed as income (at a marginal rate of 28%). However, cashing out now will incur capital gains tax (15%) as well as an early withdrawal penalty (10%).

This difference (28% vs 25% with the numbers above) is the problem. This issue is often referred to as the Net Unrealized Appreciation or NUA.

I've found some calculators here and here which (purport to) show the advantages of one approach versus the other.

What other aspects of the issue should I take into account, assuming that the cash-out option shows the better monetary return?


Some more considerations:

(1) Tax rates (both ordinary and capital gains) are likely to be different when you retire.
(2) Your marginal tax rate may be different when you retire depending on how much income you have at the time. In retirement your income may be structured completely differently than when you are working. For example, you may also have a Roth IRA/401K to pull from.

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