Individuals who plan to take distributions of appreciated employer stock from their tax-qualified retirement plan accounts may receive favorable tax treatment by using a “net unrealized appreciation” (NUA) strategy.
This strategy involves taking a “qualifying” lump-sum distribution of employer stock from a qualified plan upon separation from service or another “triggering event” (such as reaching age 59½) and paying ordinary income taxes on only the plan’s cost basis in the stock. NUA is the difference between the shares’ cost basis and their market value at the time of distribution.
When the stock is eventually sold, taxes will be due on the appreciation at distribution at long-term capital gains rates (currently a maximum of 20% for those in the top regular tax bracket) regardless of how long the employer securities may have been held in the plan. Any further appreciation is taxed at either the short-term or long-term capital gains rate, depending on the holding period.
If your plan assets consist primarily of employer stock, consider using the NUA strategy for part of the distribution and rolling over the remaining shares to an IRA. You could then sell the shares in the IRA and buy a more diversified mix of investments.
A Few Considerations
Could you benefit from the NUA strategy? While it can reduce the taxes you pay, it’s not appropriate for everyone. Think about these factors as you make your decision.
Time frame. This strategy provides the most benefit when stock won’t be sold for several years.
Taxes. The NUA strategy may be less beneficial if tax rates change or your tax rate declines in retirement.
Diversification. No matter which strategies you employ, it’s important to maintain an adequately diversified portfolio.
To learn more about tax rules and regulations for investments, give us a call today. Our knowledgeable and trained staff is here to help.
…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v