You can transfer the company stock portion which still qualifies for the tax break on the NUA to a taxable non-IRA brokerage account, and you can roll the non-company stock portion of the plan into an IRA rollover account. Skip to content rodgers-associates. Rick Rodgers. Determine the amount of gain in the stock price In an employer-sponsored retirement plan, you can elect an NUA on some, all, or none of the shares. Select the sequence of transactions when the plan holds other assets in addition to employer securities.
This provides a great way to continue deferring taxes on the account's earnings until you retire and begin taking distributions. Or it does, at least, for most of the plan's assets. But if your k includes publicly held stock in the company you're leaving, you shouldn't automatically roll these assets over to an IRA. It may make more sense to instead move the stock to a brokerage account and pay at least some tax on it immediately.
Here's a rundown of why that's the case, along with advice on how you should proceed in handling company stock when you depart a company. The explanation gets a little complex in places, but it's worth reading. Thousands of dollars in tax liability could be at stake. The underlying reason to pause before rolling over company stock can be summarized in three letters: NUA, for net unrealized appreciation. The NUA is the difference between the value of the company stock at the time it was purchased, or given to you and put into your k account, and what it's worth when it's transferred out of the k.
How that appreciation in the stock's value is ultimately taxed depends on the account to which the stock is transferred from your k. If the transfer is to an IRA, you don't pay any tax immediately, which is helpful. But you're liable to pay income tax on the stock's full NUA when you sell it. Moving the stocks to a brokerage account, on the other hand, requires you to pay income tax immediately on the cost basis of the stock—what it was worth when you acquired it.
But there's a long-term advantage. When you eventually sell the stock, the NUA will be taxed as a capital gain, at rates that are almost certain to be lower than those you pay in income tax. If the stock has risen a lot in value, you could save thousands of dollars by paying income tax on the stock now and gaining a more favorable tax treatment for the remainder of its value when you sell the stock later. Avoiding an IRA transfer for your stock also allows you to skip being forced to disburse some of their value under the IRS rules for retirement accounts.
Company stock held within an IRA becomes subject, like all retirement account assets, to required minimum distributions RMDs.
That is, once you turn 72, a certain amount of the value of the account must be taken out annually. To do so, you may have to sell some of the company stock, if you can't or don't wish to tap other assets in the account to satisfy the RMD requirement.
By contrast, when you take advantage of the NUA tax break for your company stock by not rolling it over into an IRA , you're free to sell the stock whenever you wish, since it will be free of the distributions demanded by an IRA. It's also advantageous to hold company stock outside an IRA if you wish to sell your company stock immediately after you depart the organization.
With most stocks, you're required to have held them for at least a year to have them taxed as capital gains , rather than as income.
Not so with stock that's been transferred from your retirement plan to a brokerage account. You'll be free to sell the shares the day after you transfer them out of your k , and pay only the current capital gains rate on the NUA, rather than the income tax rate you'd pay were they held in an IRA.
One caveat, though: This break does not apply to any further appreciation in the stock after it is transferred out of your k. Let's say you decide to wait to sell because you believe the stock will rise further in value. Any such increase between the transfer from your k and the sale is subject to the usual rules for capital gains. That is, the gain will be subject to income tax unless you hold the securities for more than one year before selling.
Any dividends earned on the stock before you sell it are also taxable at your ordinary income tax rate. The number of American workers who have access to a k or another retirement plan through their employer and choose to participate in the plan. These same benefits flow to your heirs if they inherit company stock that was transferred by you from a k to a brokerage account.
As with you, the heir can sell the stock immediately and pay capital gains tax. Further, your heir gets favorable treatment when it comes to how that gain is calculated. The heir pays capital gains tax not on the full appreciation in the stock's value from its cost basis—as in what it was worth when you acquired it. Rather, under what is known as a step-up in basis , the heir pays only on any appreciation since the time you died. The net result is that your heirs skip paying tax on any rise in value in the stock during the time that you owned it.
That would not necessarily be the case if they inherited the stock as part of an IRA rather than in a brokerage account.
To get the tax break that is available for company stock in a retirement plan, you'll have to pay some money upfront, which could discourage investors. But you'll most likely come out ahead, paying fewer taxes in the long run. Let's go through an example to demonstrate these tax treatments. Mike is 57, about to retire, and has company stock in his k plan. Distributions from an ESOP are based on vesting.
Vesting computes how much of the stock the employee owns. Before an employee can be percent vested, they must work with the company for a defined number of years. Vesting follows two types of schedules:. Distributions from an ESOP is taxable as income. If it is rolled into a Roth IRA, it will be taxed immediately. Dividend payments associated with an ESOP are also taxable, but are not taxed at the same rate as income.
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