MargaretMort Posted October 3, 2007 Report Share Posted October 3, 2007 I am sitting here being dumb so I thought I would look to all you smarties for help. I have a client who had a 401K when he was working. The money was invested in stocks. He has recently sold some stock, wants to send the IRS an estimated payment so he won't get hit with penalties and interest in April. He thinks he just declares the amount he invested as a now taxable amount and only pays capital gains tax on the amount he netted. I am not thinking so but I can't lay my hands on anything to give me direction. It would be a much better deal for him if he could do that as he is carrying forward a capital loss. I put in a call to the brokerage house to try to learn how this will be reported, they have not responded yet. I searched the IRS site but I guess I don't know the right questions to ask because I didn't get any answers there. Gosh, I am glad he brought this to me now and not in March of 2008. Any help or direction will be much appreciated. Margaret Quote Link to comment Share on other sites More sharing options...
joanmcq Posted October 3, 2007 Report Share Posted October 3, 2007 If he sold stock in the 401(k) its not a taxable event. If he sold stock and took a distribution, its taxable at ordinary income rates and is not capital gain income, but retirement income. He doesn't get to net it against his capital loss. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted October 3, 2007 Report Share Posted October 3, 2007 I have a client who had a 401K when he was working. The money was invested in stocks. He has recently sold some stock, wants to send the IRS an estimated payment so he won't get hit with penalties and interest in April. He thinks he just declares the amount he invested as a now taxable amount and only pays capital gains tax on the amount he netted. I am not thinking so but I can't lay my hands on anything to give me direction. It would be a much better deal for him if he could do that as he is carrying forward a capital loss. How old is your client? Did he take some cash? If he took money out of the retirement fund, he will get a 1099R from the 401K administrator at the end of the year. Depending on what his age is will depend on the way the 1099R will be coded. If he is over 59 1/2 it should just show a normal retirement distribution. If he is under 59.5 and none of the exceptions apply, the 1099R will be coded for an early distribution and the 10% penalty will apply. In either case, the distribution will be taxable at ordinary rates. If he did not take any money, just sold some stock within the 401K and replaced it with some other asset (bond fund, other stocks, MM cash account), it is a non-taxable transaction and will have no effect on his income tax return for this year. Hope this helps. Tom Lodi, CA Quote Link to comment Share on other sites More sharing options...
MargaretMort Posted October 4, 2007 Author Report Share Posted October 4, 2007 Obviously I should have been a lot more specific. He is 69 and took the money from the sale of the stock out of his 401K. I thought the entire amount from the sale would be retirement income, he thought only his original buy would be and the profit would be capital gains. He is going to be one unhappy camper when I give him that news. Thanks for your input Joan and Tom. Margaret Quote Link to comment Share on other sites More sharing options...
fredazcpa Posted October 4, 2007 Report Share Posted October 4, 2007 Obviously I should have been a lot more specific. He is 69 and took the money from the sale of the stock out of his 401K. I thought the entire amount from the sale would be retirement income, he thought only his original buy would be and the profit would be capital gains. He is going to be one unhappy camper when I give him that news. Thanks for your input Joan and Tom. Margaret If the stock is from his company and he has any left in the 401K, look into how you handle Net unrelized gain, you transfere the stock out, pay tax at basies, then sell out side of 401K pay cap gains tax on the difference Quote Link to comment Share on other sites More sharing options...
jainen Posted October 4, 2007 Report Share Posted October 4, 2007 >>He is going to be one unhappy camper<< I don't understand this attitude which has become so widespread the last ten years. Stocks do NOT have a tax advantage when held in a retirement account. All the risk, but none of the special rates. In the old days, retirement funds were managed much more conservatively with security of principle and steady growth the priorities. But our economy has gone crazy and everyone gambles their retirement on stocks. It has been a disaster for some, and I believe we will see more problems. Even the biggest retirement funds went risky and now can't find "liquidity" for their investments. Gads. So tell your client he was one of the lucky ones who got his money out before the storm hits. Why should he be unhappy at making so much? And let's be careful of the word "camper." A lot of people are in fact losing their homes. Quote Link to comment Share on other sites More sharing options...
JohnH Posted October 5, 2007 Report Share Posted October 5, 2007 Ditto! It amazes me how many people put the bulk of their retirement funds in every risky investment they can think of and then get mad when normal market forces drive the value of some of their foolish gambles DOWN. They seem to think they have a God-given right to gains no matter how much risk they choose to incur. Mention "Asset Allocation" to them and the first thing they say is "But I can't score any big hits with that Fixed Income stuff." They forget that sometimes return OF one's principal is as important as return ON the principal - even more true as we get older. Quote Link to comment Share on other sites More sharing options...
TAXBILLY Posted October 5, 2007 Report Share Posted October 5, 2007 Double ditto!! It's one of the hardest things for clients to understand. taxbilly Quote Link to comment Share on other sites More sharing options...
Pacun Posted October 5, 2007 Report Share Posted October 5, 2007 Going back to the original question... just ask your client to send 20% of what he took out to the IRS and 10% to the state (if applicable) and he should be OK when April comes. He will only pay regular Federal and state taxes when the time comes. Quote Link to comment Share on other sites More sharing options...
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