At first glance you may think this title has something more to do with troubled relationships or marital advice. But you're in luck, as its yet another thrilling concept brought to you by the IRS!
Actually, it is a strategy, and one that isn't only for the wealthy, but for anyone that has company stock in their 401k plan at work ,and may have accumulated a sizeable chunk of it. Unfortunately, it's a concept that appears to be headed for this archives, as the Ways and Means Committee of our congress has just submitted a proposal that seeks, in Section 1421, to eliminate the ability to utilize the net unrealized appreciation ("NUA") option on distributed company stock.
So why I am bothering to tell everyone now - if it's just going away? Because you have this year to still utilize, and if you have company stock in your 401k, and have a lot of appreciation (your cost is well below its value today), and if you are 55 or over, you should seek out advice.
The best way to illustrate why is with a hypothetical example. Say, you've worked at XYZ Company for 25 years, and have been in the 401k for most of it, and have allocated a % of your contribution to XYZ's stock. When you began XYZ was ~ $10 share, but today its trading close to $75 per share. Or course the price grew over those years, but the majority of your stock was purchased under $25 share. So let's just say that your total cost of all shares is $20,000 and today's total market value is $100,000.
Upon retirement, or separation of service, you can rollover your 401k plan. If you rollover the company stock too, then when you sell it - the proceeds stay in the account, and are fully taxed at your ordinary income rate when withdrawn.
Under the current NUA provision, upon your retirement or separation, you can "roll out" your company stock first before the rollover of the rest of the 401k plan. What this does is places your company stock in a separate account, that immediately taxes the cost basis at ordinary income rates, but then defers taxes until stock positions are sold (over time). Then these proceeds are taxed at capital gains rates (today 15% or /20%).
This difference of the gains being taxed at capital gains rates versus ordinary income can be quite large for some folks. As such, I would recommend you seek out your tax professional and financial advisor to understand if this strategy has a fit in your situation.
For some, it may even warrant consideration to retiring earlier than planned.At first glance you may think this title has something more to do with troubled relationships or marital advice.But you're in luck, as its yet another thrilling concept brought to you by the IRS!
Pete Thoresen
Financial Advisor
Focus Financial Network, Inc.
1000 Shelard Parkway, Suite 300
Minneapolis, MN 55426
952-225-0344 direct | 952-591-9770 main office
Securities offered through Royal Alliance Associates, Inc., member FINRA/SIPC. Insurance and investment advisory services offered through Focus Financial Network, Inc., a registered investment advisor not affiliated with Royal Alliance Associates, Inc.
