For those of you that have accumulated employer stock within your employer-sponsored retirement plan, you have a few different options when you’re eligible to take a distribution from your plan. Often times when employees leave a company, the best course of action is to roll your company retirement plan into an IRA to continue to maintain the tax-deferred status. If you have highly appreciated employer stock within the company retirement plan, however, the Net Unrealized Appreciation (NUA) tax-efficient strategy may be a great option for you to consider.
When employer stock is accumulated inside of a qualified retirement plan, it will ultimately be taxed as ordinary income when distributions are made. However, as long as certain requirements are met (the employer stock is transferred in-kind, it is a part of a lump sum distribution, and triggered by a qualifying event), the Internal Revenue Code has allowed favorable tax treatment on the Net Unrealized Appreciation (NUA) of the employer stock: the difference between the original cost basis and current market value of the shares of the employer stock. The NUA portion is taxed at favorable long-term capital gains rates (as opposed to your marginal income rate), which can dramatically lower your tax liability on the distribution of the employer stock. Because capital gains rates always offer savings when compared to equivalent ordinary income rates the NUA strategy is a very enticing strategy for many investors.
Please reach out to us if this is something you or someone you know may benefit from, and we would be happy to send you our white paper analysis of the strategy as well as set up a time for a consultation to discuss whether it makes sense or not given your financial situation.
Disclosure: The content of this article is provided for general information purposes only. The information was compiled from sources that we believe to be reliable, however, we cannot guarantee accuracy. Tschetter Group does not provide tax or legal advice. Please consult your legal or tax professional for specific information.