- Bob Kling
- Director, Tax & Business Advisory Services
- (513) 979-3161
So you are near retirement and you have accumulated company stock in an employer-sponsored retirement plan. What options do you have? One option is to leave the stock in the retirement plan. If the stock remains in the company sponsored retirement plan, or there is a direct rollover to an IRA, contributions and any earnings or dividends remain tax deferred. Distributions are taxed at ordinary income rates. Distributions are also subject to the required minimum distribution rules beginning at the age of seventy and one half.
If the stock has appreciated considerably, you may want to consider the net unrealized appreciation (NUA) tax treatment. Net unrealized appreciation is the excess of the stock’s fair market value at the time of distribution over the plan’s basis in the stock. The NUA is excluded from the employee’s taxable income at the time the securities are distributed out of the retirement plan. The plan’s basis in the stock is generally taxed at ordinary income rates at the time of the distribution. When the stock is later sold, the NUA is taxed at long term capital gains rates regardless of how long the recipient has held the stock in the plan. If on the date the stock is sold, the gain is greater than the NUA, the excess will be taxed at short term capital gains rates unless the stock is sold 12 months after receiving the distribution. Dividends paid on the stock will be taxable when paid. Required minimum distribution rules do not apply to the assets since they are now in a nonqualified account.
NUA is not for everyone and makes the most sense when there has been significant appreciation in the company stock. To get the best answer, an analysis should be done comparing the timing of the expected distributions out of a tax deferred retirement plan which will be taxed at ordinary income rates vs. expected timing of distributions out of the NUA account. In addition, IRS early withdrawal penalties should be considered if you are under age fifty nine and one half. Contact us and we can help you safely navigate the rules surrounding net unrealized appreciation.
Article written by:
Bob Kling, CPA
Director, Tax & Business Advisory Services