Written by: Jeff Campos, Wealth Manager
Here at Wheelhouse, we guide many families nearing retirement who work for companies that allow employees to purchase company stock within their employer-sponsored retirement plans. This offers employees the opportunity to invest in their company and the ability to let those assets grow (or decline) over time in a tax-deferred account while saving for retirement.
Upon retirement or reaching age 59 ½, employees have a few options for their company stock held within their employer-sponsored retirement plans. One common option is to roll the company stock into an IRA, which allows the stock to continue growing (or declining) on a tax-deferred basis, with distributions taxed as ordinary income in the future. Another option at that time is to utilize the Net Unrealized Appreciation (NUA) strategy. While not suitable for everyone, this strategy may benefit people looking to potentially save on taxes within their 401k.
The NUA strategy allows individuals with company stock in their employer-sponsored retirement plan to distribute the shares from the plan and move them to a non-qualified account. At the time of distribution, the individual is taxed on the original cost basis of the company stock as ordinary income. The original appreciation (NUA) on the company stock is then taxed as long-term capital gains when sold in the future, offering the individual more flexibility on when to realize capital gains or losses. Any future gains beyond the original NUA would be subject to long-term capital gains if held longer than 12 months, and short-term capital gains if held for 12 months or less.
There are a few other rules to consider with this strategy. First, the individual must take a full distribution of their employer-sponsored plan. Then, they decide whether to move the company stock in-kind to a non-qualified account, as discussed above, or sell the company stock immediately within the non-qualified account. Selling the stock right away would result in the appreciation (NUA) being taxed at long-term capital gains rates and would forfeit potential future growth of the stock.
This is one of the many considerations we evaluate with our clients to determine if it aligns with their situation. If you have any questions about your company stock within your employer-sponsored retirement plan, please reach out to our Wheelhouse team.
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