*That is, don’t do it without reading this first.
If you have employer stock in your company retirement plan, there are some special tax benefits that you’ll lose if you put that stock into an IRA.
Generally, when you leave your employer you’ll roll your retirement account out to an IRA. Once you’ve passed age 59½ you can take distributions from the IRA with no tax penalty, but all distributions are taxable at ordinary income rates. In current brackets these will typically be from 22% to 37%.
But there’s a special provision for employer stock. You can distribute the stock from your retirement plan in kind, moving it to a non-tax qualified account. Your taxable event will be only the stock’s basis. Then when you sell the stock you’ll be taxed only on the gain over the basis, and at the more favorable long-term capital gains rates.
This is a huge tax benefit – but it is a case of a little pain now for a great gain later.
Here’s an example: Say you have a $500K 401K, of which $100K is company stock. That’s the market value of the stock – but the basis of the stock is only $20K. That means that the market price of the stock as it was contributed to the 401K over the years was only $20K – the remaining $80K comes from growth.
You open an individual brokerage account and transfer the $100K of company stock there in kind. The taxable event to you is the $20K in basis. If you’re in a 25% bracket, you’ll pay $5K in taxes on the distribution. The remaining $400K in the account gets rolled over to an IRA. When you sell stock from the individual account, you pay capital gains tax on the gain over the basis. This $80Kgain is always long-term, no matter how long the stock has been in your brokerage account. If the stock continues to grow, gains above the $80K will be long term or short-term depending upon the holding period. For most taxpayers this will be 15%; for some, 0% and others, 20%.
Let’s continue the example. You immediately sell the employer stock from your new brokerage account. Your capital gains tax is 15% of $80K, or $12K. Total tax burden to distribute $100K is $17K.
BUT . . . if you didn’t do this, and instead rolled the shares into your IRA, and distributed from there, the entire $100K transaction would be taxed at your marginal rate of 25%, or $25K. Bad move! You could have saved yourself $8K in taxes.
This distribution of NUA can be a tremendous tax benefit! If you’re working with an adviser who doesn’t bother to look at your 401K holdings before making any recommendations, or doesn’t suggest you consider the employer stock distribution, you’re working with the wrong adviser!
At CameronDowning we are CERTIFIED FINANCIAL PLANNER™ professionals, meaning we are held to a fiduciary standard of client care. Our advice is given in your best interests, always.
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