Whenever employees leave a job, they frequently roll their k plan's assets into their IRA. In most cases, this is a great way to continue deferring taxes until you retire and begin taking distributions. However, if your k or other employer-sponsored retirement plan includes highly appreciated, publicly-traded stock in the company you work for, you could save thousands of dollars by paying taxes on the stock now rather than later. Company stock rolled into the IRA is treated the same way.
But if you withdraw your company stock from your k and, instead of rolling it into an IRA, transfer it to a taxable brokerage account , you avoid ordinary income taxes on the stock's net unrealized appreciation NUA regardless of whether you sell or continue to hold the stock. The NUA is the difference between the value of the company stock at the time it was purchased put into your k account and the time of distribution transferred out of the k.
So the only part of your company stock that is subject to your ordinary income taxes is the value the stock was when it was first acquired by the k plan. In sum, because of this NUA tax break , it may be most beneficial for you not to roll over your company stock from the k into an IRA.
However, the other assets in the k - such as mutual funds, etc - do not receive the NUA tax break, so you would still likely want to roll these plan assets into an IRA and continue deferring taxes on past and future growth. Also, when you take advantage of the NUA tax break for your company stock by not rolling it over into an IRA , you won't have to worry about taking required minimum distributions RMD on those assets since they are not part of an IRA.
Selling the k Stock Say you sell the k stocks immediately instead of continuing to hold them in a regular brokerage account. For most stocks, when you sell them, you are required to have held them for at least one year to receive a lower capital gains tax rate on them, but this does not apply to the NUA. Therefore, you could sell the shares the day after you transferred them out of your k and pay only the lower current capital gains rate on the NUA.
On the other hand, if you were to roll the stock into your IRA, you will eventually pay tax at a higher rate than your ordinary tax rate. Holding the k Stock Say you decide to hold onto the stock from the k in your brokerage account. If the stocks appreciate further and you want to take advantage of the lower capital gains tax on that appreciation, you must hold the securities for more than one year before selling.
Otherwise, any growth on the stock that occurred since the day it was moved out of the retirement plan will be taxed at your ordinary income tax rate. Future dividends are taxable at your ordinary income tax rate.
The tax is based on your cost basis , which, for tax purposes, is generally zero since you haven't yet paid tax on the contributions. The zero-tax cost basis means that it cost you no taxes, so everything above that tax cost which is zero is profit and thus still taxable. In other words, a cost basis of zero for tax purposes means everything in the IRA is taxable for your beneficiaries. However, sometimes people will make after-tax contributions to an IRA plan. Those dollars would come out tax-free on a pro-rata basis.
However, inherited NUA stock is treated differently. Your heirs still inherit your cost basis in the stock, but when they distribute the NUA stock, they are entitled to the same treatment that you would have received i. So when your heirs receive the inherited stock , they will pay only capital gains tax on the NUA. If there was any appreciation between the date you distributed the stock from the k and the date you die, the value of the appreciation will receive a step-up in basis.
This means that for tax purposes your beneficiaries receive the stock at the value it was on your date of death. So if they sell it for the same price it was when they inherited it, there is zero tax on that appreciation - it therefore passes to them income-tax free. Mike is 57, about to retire and has company stock in his k plan.
At that time, the distributions would be taxed as ordinary income. When Mike dies, his IRA beneficiaries will pay ordinary income tax on all of the money they receive. But if Mike withdraws the stock from the plan rather than rolling it into his IRA, his tax situation would be different. If Mike immediately sold the stock, he would, on the NUA, have to pay only the lower capital gains. Say Mike holds that stock for a year.
When he sells it, he pays the lower capital gains tax on the NUA and any additional appreciation. But they would not receive a step-up in basis for the NUA. This means they would have to pay the lower capital gains tax on the NUA. But if there is an appreciation between the date Mike distributed the stock from the k , and the date of Mike's death, that appreciation will receive a step-up in basis; and therefore Mike's heirs won't have to pay income tax on that appreciation.
Here is the comparison if Mike immediately sells the stock: Say Mike doesn't sell immediately and keeps the stock in the brokerage account. What would his beneficiaries have to pay? And you should only consider taking advantage of it if the stock has appreciated significantly from the time it was purchased by your plan. If it has not, you would be better off rolling it over to your IRA and letting it continue to grow tax deferred. You can, however, split up shares of stock.
Suppose that some shares had a very low value when they were first contributed to your k , while others did not. Also remember that you will have to distribute and transfer your plan's assets as a lump sum. This means that all of the plan's assets, not just the employer's stock, must be removed within one calendar year. Therefore, since trustees can take several weeks to process such requests, make sure you give yourself enough time so that the distribution and transfer occur in the same year.
However, that also means that if the stock has grown enough the NUA is worth more than the original amount , it could be worthwhile to pay the penalty in order to capture the NUA benefit. Have your employer transfer the non-stock assets directly to your IRA. Then have the stock distributed to you in kind.
That way, there is nothing left in the plan for the IRS. Also, for record-keeping purposes do not mix NUA stock with other company stock in the same brokerage account. Doing so could make it very difficult to get the tax break.
Instead, set up a separate account to hold the NUA stock. Other factors to determine before deciding not to roll the assets into an IRA are whether the shares make up a significant amount of your net worth , and whether your main goal is greater diversification. Remember, once the stock is out of the retirement plan, you will owe tax on any profits, albeit at a reduced rate. On the other hand, if you rolled it over to an IRA and sold shares, the tax is deferred.
Finally, in case your employer is not familiar with the NUA tax tactic, you may have to do some convincing. This might involve getting a competent financial advisor or accountant to intervene on your behalf. Conclusion To get the tax break that is available for company stock in a retirement plan, you'll have to spend some money upfront.
And this may discourage some investors from using it. But when compared to the tax burden you or your heirs may face in the future, it could be money well spent. For further related reading, see Moving Your Plan Assets? Dictionary Term Of The Day. Passive investing is an investment strategy that limits buying and selling actions. Broker Reviews Find the best broker for your trading or investing needs See Reviews.
Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. Rolling Over Company Stock: Example Let's go through an example to demonstrate these tax treatments. Passive investors will purchase investments How much a fixed asset is worth at the end of its lease, or at the end of its useful life.
If you lease a car for three years, A target hash is a number that a hashed block header must be less than or equal to in order for a new block to be awarded. Payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. No thanks, I prefer not making money. Get Free Newsletters Newsletters. Not Rolling into IRA. Inheriting from Regular Brokerage Account. Amount receiving step-up in basis the amount that is tax free.More...