His Former Employer Will Pay a $1.64 Dividend in December. His 401(k) Has $1,640 Riding on It, but That Doesn’t Mean a Check Is Coming
A dividend can pad your 401(k) balance without ever reaching your bank account. Before a retiree touches his old employer's stock, a hidden tax choice and a few plan rules could decide how much of it he actually keeps.
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Picture a 66-year-old who left his longtime employer years ago, and though his paychecks stopped, a big piece of his 401(k) still sits in that company’s stock. Every decision its board makes still shows up in his retirement account.
He could have worked at any large public company. United Parcel Service (NYSE:UPS | UPS Price Prediction) makes a timely example. On November 4, it declared a $1.64 quarterly dividend, payable December 3.
Say a 401(k) holds the equivalent of 1,000 UPS shares, worth about $108,000 at recent prices. This quarter’s dividend on that stake comes to $1,640, or $6,560 a year if the rate holds. Whether any of that money gets to his checking account comes down to plan rules most participants have never read.
Where the Dividend Goes
Many plans that offer employer stock hold those shares in a company-stock fund. That is a pooled account where you own units of the fund, and the shares stay in the plan’s name. The cash from UPS dividends goes to the plan trustee. Depending on the fund’s rules, the dividend either raises the value of each unit or buys more shares.
Some plans allow participants to receive dividends on employer stock in cash. Those payments generally count as ordinary income in the year they’re received. Qualifying employer-stock dividends also avoid the 10% early-withdrawal penalty, although our 66-year-old is already exempt because of his age. A reinvested dividend stays tax-deferred, while a cash payment creates taxable income this year.
Company Stock Comes With a Hidden Tax Choice
Our retiree built up employer shares over decades of paychecks, often at prices far below today’s. The plan tracks their cost basis, meaning what it originally paid for them. The appreciation while the shares were held in the plan is called net unrealized appreciation (NUA).
Suppose he owns $100,000 of employer stock with a $40,000 cost basis. If he takes a qualifying lump-sum distribution and moves the shares directly into a taxable brokerage account, the $40,000 basis is generally taxed as ordinary income that year. The remaining $60,000 of NUA receives long-term capital gains treatment when he sells. The transaction must meet IRS requirements, including distributing the qualifying plan balance within one tax year.
If he rolls those shares into an IRA, he gives up that option. Every dollar, including the appreciation, eventually comes out at ordinary income tax rates.
Withdrawals Are Where the Tax Bill Shows Up
Dividends left inside a traditional 401(k) stay tax-deferred. The bill comes later. Assume he withdraws $6,560 and lands in the 22% bracket. Assume too that his income already sits in the range where every extra dollar makes 85 cents of Social Security benefits taxable.
Under those assumptions, the withdrawal adds $12,136 of taxable income and roughly $2,670 of federal tax. The effective rate is near 41%. Retirees below the Social Security limits or in a different bracket will see a different number.
Medicare can add another cost. Its income-related monthly adjustment amount (IRMAA) generally uses income from two years earlier. For 2026, the first surcharge starts above $109,000 for individual filers or $218,000 for couples filing jointly, adding $81.20 a month to Part B. The taxable cost basis in an NUA distribution can also push income above the threshold.
A Growing Dividend Can Hide a Shrinking Stake
UPS shows how this happens. Its quarterly dividend rose from $1.02 in 2021 to $1.64. Over the five years through November 5, though, the stock lost about 47% of its value. Its roughly 6% yield is high partly because the share price dropped.
When one former employer dominates a 401(k), one company’s results drive the whole retirement plan. Spreading investments across multiple dividend payers reduces the damage when one of them stumbles. That is the reasoning behind a dividend ladder, which spreads holdings across sectors and payment months (we walked through how to build one, without ever selling a share, in a free guide here).
Three Moves to Make Before Touching Company Stock
- Ask the plan administrator for your cost basis in writing, then run the NUA math before any rollover. The lower your basis compared with today’s value, the more NUA can save you.
- Find out whether your plan reinvests dividends or pays them in cash. If you’re taking cash, add it to this year’s income estimate and check whether it pushes you over an IRMAA limits two years from now.
- Work out what percentage of your 401(k) is in former-employer stock. Selling shares inside the plan generally creates no immediate tax, but it can eliminate the NUA opportunity on those shares. Compare that option with an NUA distribution before making changes.
A dividend added inside your 401(k) can increase its value without putting cash in your pocket. What you eventually keep depends on how the money comes out, the federal taxes you owe and whether the withdrawal increases your Social Security taxes or Medicare premiums.
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Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
