If you work or have worked for a successful, publicly traded company, there is a relatively unknown tax break you should be aware. It deals with net unrealized appreciation (NUA) arising from company stock inside an employer retirement plan. Here are some important points to consider before taking advantage of this opportunity.
- This tax break only applies to stock in the company in which you were employed, and it needs to reside inside the employer retirement plan (e.g., 401K plan). To reap the full benefit, it should have experienced significant appreciation in value. You must be at least 55 years of age to avoid the 10% penalty associated with withdrawing the funds.
- One must withdraw their entire plan balance as a lump sum distribution within the course of a year. The NUA applicable shares are placed in a taxable account rather than an IRA. The cost basis of the shares is taxed at ordinary income tax rates in the year of the distribution. However, the appreciation will be taxed at long term capital gain tax rates at the time of sale.
- The key to this strategy is for the shares to have significant appreciation. The more appreciation, the larger the tax benefit. For those with a large capital loss or capital loss carry-forward, timing the sale of the appreciated company stock with a capital loss from another investment would add further benefit to the strategy as the two could offset each other.
The details of this strategy involve complexity, but the tax saving benefits could be substantial. If you are considering the applicability of this strategy to your situation, feel free to reach out. I’d love to answer any questions and discuss how it might fit into your overall plan for funding your future.