facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

Retired Military Finances 401: Net Unrealized Appreciation

Retirement Funding Taxes

Employer Stock in Your 401(k)? Check This Out

If you've purchased company stock in your 401(k), I've got a special deal for you G.I. You are eligible for special tax treatment of that stock. Employer stock is eligible for what is called Net Unrealized Appreciation (NUA). This stuff is complicated (that's why it is a 401 article) but if employed correctly, you can save a lot of tax money.

Here are the basics. You have the option to take the stock out in-kind (without selling it) and you will pay taxes on the amount you paid for the stock, not the Fair Market Value (FMV). The taxes on the increase in price of the stock will not be taxable until you sell your stock. And here's the best part. Since the gains will be long-term capital gains you're taxed at a lower rate. It could be as low as 0% and won't go above 23.8% (including ObamaCare surtaxes). In almost all cases, the tax will be 40% or so less than the tax would that would be paid if the stock was taken out as a normal distribution (sell it and take a cash distribution).

There are some things you need to do right though.

  • The stock must be transferred out in-kind which means you don't sell it. For example, you withdraw 100 shares of IBM stock (assuming you work for IBM)
  • If the stock somehow ends up in an IRA, you lose the ability to take advantage of NUA
  • You must completely empty out the 401(k) the year you transfer the stock out of the 401(k) plan. You can move the remainder to an IRA
  • You can't take distributions from the 401(k) prior to the year you take the NUA distribution
  • Make sure your heirs understand the stock has NUA. This stock will NOT receive a step-up in basis upon your death

As with most advanced tax strategies, this needs to be done right. Just like you did during your military career, consider bringing in a SME.


If you enjoyed this article, you might like the following blog posts:

Retired Military Finances 401: Restricted Stock Units


Retired Military Finances 401: Non-Qualified Stock Options


Don't Leave Money on the Table (and Don't Get Double Taxed Either)





Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.