Cashing out a 401(k) to buy stock is tricky

Q: I am 64½ and have a 401(k) with my former employer that has been there since I left the company five years ago. I now work for an employee-owned supermarket that gives stock to employees. The stock is doing so well I want to take my 401(k) out and purchase shares of stock in the company.  How can I do this so I will not have to pay taxes on the money I would get from the 401(k)? The company does not do rollovers, and I don’t know how to get the cash to buy the stock so the IRS knows I am not keeping the cash but reinvesting it. — Glenda Hickman, Melbourne, Fla.

A: When it comes to having a 401(k) with a former employer, your options for a non-taxable event include: leaving the money in your former employer’s 401(k) plan; rolling it into your new employer’s 401(k) plan, if it’s allowed; or rolling it into a traditional IRA.

In your case, it seems that your employer doesn’t allow what experts refer to as roll-ins. If that’s true, your options are limited, says Denise Appleby, the CEO of Appleby Retirement Consulting in Grayson, Ga. “The only way to withdraw amounts from your 401(k) without the amount being taxable, is to properly roll over the amount to an eligible pretax retirement plan, such as a traditional IRA,” she says.

But that doesn’t address your goal of buying shares of stock in your employer.

So Appleby suggests asking your employer if they would accommodate the purchase of shares of the stock in an IRA. If yes, speak with an IRA custodian about their operational requirement for processing such a purchase, or shop around for an IRA custodian that specializes in private purchases of non-publicly traded securities, and the like.

If your employer and an IRA custodian would accommodate the transaction of buying the employer stocks in your IRA, you could roll over the amount from your 401(k) to your traditional IRA, and then use cash from the rollover to purchase the shares in your IRA, says Appleby.

Another option: Ask your company’s employee benefits department to change your employer’s 401(k) plan to accommodate roll-ins. You might have to wait awhile; but if they allow such rollovers, it could be easier to purchase the stock in your employer’s 401(k) plan. Of course, the plan provisions would need to allow such investments.

One last note: Some financial experts say it’s never a good idea to heavily invest in one security, including shares of the company for which you work. Some recommend limiting investments in employer securities to 10% to 20% of your portfolio. Appleby recommends talking to a financial adviser for help with determining a suitable amount to invest in employer securities.

Robert Powell is editor of Retirement Weekly, contributes regularly to Paste BN, The Wall Street Journal and MarketWatch. Got questions about money? Email  rpowell@allthingsretirement.com .