Taking Care of Mom and Dad: Dealing with Non-Cash Assets
So, your parents can roll over the money from various defined-contribution accounts into a single one without paying any taxes. The first question will be whether the single account should be a 401(k) -- the parent who owns the other accounts has to have a job to make this happen -- or an IRA.
The next question will probably involve how to deal with stocks and other noncash assets that your parents may have in their retirement accounts.
This issue can be complex because employer-sponsored accounts can include company stock, which many larger companies use as the matching portion of 401(k) contributions. And IRAs can include an even more diverse mix of noncash assets, including:
- annuities;
- real estate;
- stocks;
- bonds;
- collectibles (art, antiques, stamps, coins, etc.).
If your parents receive cash and noncash assets in an eligible rollover distribution, they can roll over part or all of the cash, part or all of the noncash assets or any combination of the two. But they can't switch noncash assets with an equivalent amount of cash -- in other words, "cash out" the assets themselves. They must either roll over the noncash assets or sell them and roll over the proceeds.
An example: Your mom receives a total distribution from her employer's plan consisting of $10,000 cash and $15,000 worth of stock. She keeps the stock. She can roll over the $10,000 cash to an IRA but she can't roll over an additional $15,000 cash representing the value of the stock she choose not to sell. She'll have to pay income tax on the what she keeps.
The silver lining to the rule that says your parents have to sell noncash assets: They don't have to pay any tax on profits that they make from those sales. As long as they roll all of the sale proceeds to the new account, it's tax-free.
