Michael L. Schwartz, RFC, CWS, CFS
Many
people despite a poor decade for the stock market have taken advantage of a net
unrealized appreciation (NUA) tax break.
For those lucky enough to have advisors knowledgeable enough to advise
those clients, these people stand a major advantage over those with less
knowledgeable advisors.
Clients
who hold employer stock in their company’s retirement plan such as their 401k
may be able to profit from the NUA maneuver.
While most cases will involve those publically traded companies, some
private companies may also be eligible to take advantage of this strategy. The more your shares have appreciated, the
greater the advantage.
Instead
of rolling over your shares at a qualifying date, you instead would roll the
shares over into a non-qualified (taxable) account. At that time, the only tax owed would be that
of the cost basis of the shares in the account.
At a later time, the NUA shares can be sold paying a tax at the capital
gains rate then in place.
For
example, Harry terminates his employment with his employer either through
retirement or other reason. He leaves
with $500,000 in his 401k plan, including $200,000 of employer stock. His employer tells him the cost basis of that
stock at that time is $35,000. He rolls
over $300,000 not inclusive of company stock into an IRA. The other $200,000 of company stock he places
in a taxable brokerage account. Harry
reports only $35,000 of ordinary income on his tax return. The $200,000 would carry forward a cost basis
of $35,000 when sold the NUA would be taxed as long term gains currently at 15%
instead of a current ordinary income rate of 35%.
If
the rollover to an IRA is done prior to moving the NUA shares there would be no
mandatory withholding of 20% on moving the NUA shares from the pension plan. This is an exception to the general
rule. Another case where having a
knowledgeable advisor comes into play.
If
some of the previous shares were purchased with after tax dollars, there are
other rules that would come into effect.
These can be discussed as the need arises. But just being advised by someone
knowledgeable to the rules can indeed save the client an unneeded tax bill
later in life.
Michael L.
Schwartz, RFC, CWS, CFS is a Jenkintown, Pa wealth manager. He specializes in Retirement Wealth
Distribution, Retirement Planning with a high concentration on tax-efficient
distribution strategies. He is also a
member of the Ed Slott Elite IRA Advisor Group.
He can be reached at 215-886-2122 or mike@schwartzfinancial.com. He offers securities through First Allied
Securities, Inc. (Member FINRA – SIPC) A Registered Broker Dealer and Advisory
Services through First Allied Advisory Services Inc. A Registered Investment Advisor.
