Beware of brokers pushing distributions

Dear Scott: In one of your columns you mentioned that selling Abbott in a retirement account would have no tax consequence. It got me to thinking about something that happened to me. When I retired from Abbott six years ago, I was talked into moving my 401(k), which contained $1 million dollars in Abbott stock and mutual funds, into a taxable account. The result was a huge tax bill. The broker also convinced me to sell half of my Abbott, and his sales commission was way too much. How could this have happened to me?

-- F.N., North Chicago

Dear F.N.: Allow me to finish your story. After he sold the Abbott (ABT) stock, he talked you into buying some "can't miss," "best thing since Beluga caviar on the Riviera" investment that had an exorbitant sales charge, right? You might be surprised how often I run into this.

Frankly, there are unscrupulous advisers out there who prey on good folks like you, and I have one wish for them. They should be summarily drawn, quartered, keelhauled and stripped of their brokerage license with no "get out of jail free" card.

What you did is known as a distribution, when what you should have done is known as a rollover. When you take a distribution, you are taxed on the entire amount since the contributions and growth have never been taxed. A rollover allows your money to continue growing tax-deferred and permits you to be taxed gradually.

For example, if you need income to live on, you take a distribution in that amount and pay taxes on that amount. Conversely, if you let your retirement money grow, you can take the minimum amount required by the IRS when you reach age 70.5 and set up a successor IRA or a stretch IRA. Both of these allow you to pass on retirement money to a beneficiary (in one case a spouse, in the other a non-spouse) and allow it to continue growing tax deferred.

If you truly desire to take a lump-sum distribution of highly appreciated company stock, consult a tax adviser about using what's known as net unrealized appreciation (NUA). This allows you to move the stock to a taxable account, pay tax on its cost basis, and then sell the stock at a later date paying a long-term capital gains tax of 15 percent.

Always approach your investment assets the same as a major health decision: Get a second opinion.

This is especially true if someone is advising you to take a lump-sum distribution from a retirement plan without a gol-durned good reason.

U. Scott Smith is with Wealth Management Services at Waukegan Savings Bank. Write him at 1324 Golf Road, Waukegan, IL 60087 or usmith@moneyconcepts.com