I have unfortunately lost my job and will probably defer any payment of my 401(k) for now and hopefully be able to find a job sooner rather than later. However, I have the option of having only the company stock and ESOP portion paid out - an option I am considering. Since I am only 38, would this be treated as an early withdrawal with the 10% fee? It seems company stock is treated differently than the rest of your account (which I would NOT be cashing out... )
Thanks, ~J

I am not entirely sure, but I believe the ESOP portion would be taxed as ordinary income, without any additional penalty. At least, that's what happened with an ESOP plan that my former employer had, and which they discontinued several years ago.

As for company stock in your 401(k) - there are indeed a few key differences in how company stock is treated compared to other types of investments. If they actually distribute shares of stock (as opposed to selling the shares you have in your account and sending you cash), then the taxable amount of the distribution is the cost basis for the shares (which one hopes is less than the current market value of the stock). The difference between the cost basis and the current value is unrealized appreciation, and you do not get taxed on that until you actually sell the shares, and at that point it is taxed as capital gains, not ordinary income. Hence distributing the shares is a good deal for you compared to distributing cash.

As for the 10% penalty - yes, you would have to pay that, but again it's 10% of the cost basis, not 10% of the current market value. Another bonus for taking the distribution in shares rather than cash.

Determining the cost basis for the shares can be tricky - talk to your HR to make sure thy give you the cost basis, in writing.

One final thing - read the attached article, which states that you must take the entire balance of the 401(k) in order to qualify for this special tax treatment on the company shares. So whether this makes sense for you or not is impossible for us to determine without a lot of additional information. You may be better off either leaving the 401(k) alone for now, or rolling it to an IRA (although once you do that you lose the favorabe tax treatment for the company shares). Unfortunately it's a complicated decision.

Robert Powell: If you have company stock in your 401(k), tricky decisions await - MarketWatch