by Archie M. Richards, Jr.
April 9, 2007

Recently retired at age 62, May has $75,000 in a 401(k) plan at Vanguard. She's confused by a recent column of mine titled, "Common Tax Mistakes in Transferring Wealth." The column said that if you hold a substantial amount of your employer stock in a 401(k) plan, you shouldn't roll it over to an IRA, because all the money subsequently withdrawn from the IRA would be taxed at potentially high rates as ordinary income, as if it were salary.

Instead, transfer the employer's stock to a non-IRA brokerage account in your name. You pay tax at ordinary rates in the year of the transfer, but only on your cost of the stock. Thereafter, just the appreciation is taxed, but only at the maximum rate of 15 percent and only when the stock is sold.

May asks several questions:

• "What do you mean by transferring stock to my brokerage account held in my name. I have only one account - my 401(k) account at Vanguard."

  You would set up two new brokerage accounts, May - a regular, non-IRA account and an IRA. The stock of your former employer would go to the regular account. The other 401(k) assets would go to the IRA.

  But use the non-IRA account only if you have a (SET ITAL) substantial (END ITAL) amount of your former employer's stock. Otherwise, roll everything over to the IRA. If you're not sure how high substantial is, see a tax advisor.

• "Everyone recommends rolling over a 401(k) plan to an IRA to avoid high taxation."

  And they're correct, because taxes are delayed until money is withdrawn from the IRA, with no withdrawals required until you reach 71½. (A subsequent column corrects the mistake; it's 70½.)

  But transferring your employer's stock separately to a non-IRA account is an exception. It enables you to take advantage of low-taxed long-term capital gains and avoid high-taxed ordinary income.

• "What do you mean about paying tax only on my cost? Are you referring to the fee I pay in arranging the rollover to the IRA?"

  No, I refer to the total amount you spent over the years to buy your employer's stock. If you have little or none of such stock, you should disregard this special consideration and just roll everything over to the IRA.

• "I still fear the Enron thing or a company buy-out."

  You'd have reason to fear another Enron if the stock price of your company has been flying and management is extremely optimistic about the firm's prospects. But if the stock price has been humdrum, and management isn't wildly optimistic, you have nothing to worry about.

  A "buy-out" would occur if the company's management or perhaps another company plans to buy all of your company's stock. Any buy-out would (SET ITAL) benefit (END ITAL) you, because the price of the stock would rise, perhaps substantially. A buy-out might lead to employee layoffs, but these wouldn't affect you because you're already retired.

• "As long as I leave the funds in the 401(k), the company controls, right?"

  The company probably offers several choices of Vanguard funds. But it leaves to you to make the actual investment selections.

Melanie writes, "Do you have information about the new regulations going into effect regarding disclosure of fees. I understand that Congress is looking into this. Who should I call or email about this matter?"

The SEC might help, Melanie, or a staff member of the appropriate Congressional committee. But trying to find out what the federal government intends to do is like swimming in mud.

Are you using this inquiry as an excuse to delay investment decisions? Don't delay. The best time to invest is when you get the money. Accept the risk of being wrong temporarily in the short term. This is the only way to profit from the market rising in the long term.

The exchange-traded funds or Vanguard index funds I suggest in my website have rock-bottom costs. Get going with those. Let the government spin its wheels as it may.