Can I Sell Company Stock From My 401k?

Many 401(k) plans offer the ability to hold company stock, which presents unique opportunities and challenges. For employees with a significant position in their company’s shares, the decision to sell involves navigating specific plan rules and tax consequences.

Determining Your Eligibility to Sell

The ability to sell company stock held within a 401(k) is governed by the rules outlined in the plan document. Because each company’s plan is different, you must consult your specific plan’s summary plan description or speak with the plan administrator to understand your options.

One primary scenario for selling is after separating from the company, whether through retirement, resignation, or termination. This “severance from employment” is the most common trigger for a distribution, lifting restrictions on your vested balance and giving you control over the assets.

The other scenario involves selling shares while you are still an active employee, known as an in-service distribution. Not all 401(k) plans permit this, but for those that do, there are strict conditions. Often, a plan will require the employee to reach a specific age, most commonly 59 ½, before they are allowed to sell or move company stock.

Understanding the Tax Implications

When you decide to sell company stock from your 401(k), you face a choice with significant tax differences. The first option is to sell the stock inside the 401(k) plan itself. This action is not a taxable event, as the sale simply converts the stock into cash within the tax-deferred account. Taxes are not due until you take a withdrawal, at which point the withdrawn amount is taxed as ordinary income.

The second option is to take an in-kind distribution of the shares, transferring them from the 401(k) to a taxable brokerage account. This strategy uses a tax rule known as Net Unrealized Appreciation (NUA). The NUA is the difference between the stock’s original cost basis and its current fair market value at the time of distribution. This tax treatment is only available for lump-sum distributions, which require you to distribute your entire vested plan balance within a single tax year.

Under the NUA rule, you immediately pay ordinary income tax on the stock’s cost basis, plus a 10% penalty if you are under 59 ½. The tax on the NUA itself is deferred until you sell the shares from your brokerage account. The advantage is that the NUA is taxed at more favorable long-term capital gains rates, regardless of how long you held the stock.

For example, assume your 401(k) holds company stock with a market value of $100,000, but the plan’s cost basis is only $20,000. If you take an in-kind distribution, you would pay ordinary income tax on the $20,000 cost basis. The remaining $80,000 is the NUA. If you sell the stock from your brokerage account, that $80,000 is taxed at the long-term capital gains rate. Any additional appreciation after the distribution is taxed as a short-term or long-term gain, depending on how long you hold the stock.

The Process for Selling or Distributing Stock

To execute a transaction, contact your 401(k) plan administrator. The administrator will provide the necessary forms, explain the specific procedures for your plan, and can confirm the cost basis of your shares, which is needed for tax calculations if pursuing the NUA strategy.

If you choose to sell the stock inside the 401(k), the process is straightforward. You can log into your 401(k) account portal, navigate to your holdings, and select the company stock fund. From there, you execute a “sell” or “exchange” transaction, which converts the stock to cash or moves the value into another investment fund within the plan.

Executing an in-kind distribution to utilize the NUA rule is a more involved process. You must first have a taxable brokerage account established to receive the shares. You will then complete the plan’s distribution paperwork, which is often more detailed than a simple withdrawal request. On this form, you will elect a direct rollover for the non-stock assets to an IRA and specify that the company stock be transferred in-kind to your brokerage account. The shares must be transferred directly as stock and cannot be converted to cash before leaving the 401(k).

Managing Assets After the Transaction

The actions you take after the sale or distribution are important for managing the resulting assets.

If you sold the company stock inside your 401(k), the proceeds are now a cash balance within your retirement account. This cash is not invested and will not generate returns until you take action. You will need to reinvest that money into the other investment options available in your plan, such as mutual funds or target-date funds. This is also an opportunity to assess your asset allocation and ensure your portfolio is properly diversified.

If you completed an in-kind distribution, you now own the company stock in a personal brokerage account. You are responsible for tracking the stock’s cost basis, which the plan administrator will report on IRS Form 1099-R. This form will show the gross distribution amount, the taxable amount (the cost basis), and the NUA. You must decide when to sell the shares, which will trigger the capital gains tax on the NUA. This decision can be based on your income needs, tax situation, or a desire to diversify your holdings.