In a traditional 401(k), all distributions are taxed as ordinary income.
If you have company stock in your 401(k) when you retire, you have an ,exception (opportunity) as to how that particular asset gets taxed. Company stock held in a 401(k) has an opportunity to be taxed using NUA - Net Unrealized Appreciation.
If at time or retirement, you take a lump sum distribution of the company stock and place it all into a non-qualified brokerage account, you will owe regular income tax on the BASIS (fair market value at the time it was contributed to the account) of that company stock only. The remainder of the value (the growth) of that company stock will all be treated as a long-term capital gain, often, significantly less than ones income tax bracket, therefore saving a lot of tax dollars for some individuals.
CAVEAT:If the company stock is held in the brokerage account, and the participant dies, the stock passes to the beneficiary at the original basis, and does not step-up as other equities would in a non-qualified account.
Outside of the company stock/NUA issue, other assets in the 401K are fully taxable as ordinary income.
Again, check with a professional tax advisor before utilizing this type aof strategy.
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