NUA AT A GLANCE You receive a lump-sum distribution from your 401(k) plan consisting of $500,000 of employer stock. The cost basis is $50,000. You sell the stock 10 years later for $750,000.* Tax payable at distribution--stock valued at $500,000 Cost basis--$50,000
There is one exception: even if your distribution doesn’t qualify as a lump-sum distribution, any securities distributed from the plan that were purchased with your after-tax (non-Roth) contributions will be eligible for NUA tax treatment. NUA IS FOR BENEFICIARIES, TOO If you die while you still hold employer securities in your retirement plan, your plan beneficiary can also use the NUA tax strategy if he or she receives a lump-sum distribution from the plan. The taxation is generally the same as if you had received the distribution. (The stock doesn’t receive a step-up in basis, even though your beneficiary receives it as a result of your death). If you’ve already received a distribution of employer stock, elected NUA tax treatment, and die before you sell the stock, your heir will have to pay long- term capital gains tax on the NUA when he or she sells the stock. However, any appreciation as of the date of your death in excess of NUA will forever escape taxation because, in this case, the stock will receive a step-up in basis. Using our example, if you die when your employer stock is worth $750,000, your heir will receive a step-up in basis for the $250,000 appreciation in excess of NUA at the time of your death. If your heir later sells the stock for $900,000, he or she will pay long-term capital gains tax on the $450,000 of NUA, as well as capital gains tax on any appreciation since your death ($150,000). The $250,000 of appreciation in excess of NUA as of your date of death will be tax free. SOME ADDITIONAL CONSIDERATIONS If you want to take advantage of NUA treatment, make sure you don’t roll the stock over to an IRA. That will be irrevocable, and you’ll forever lose the NUA tax opportunity. You can elect not to use the NUA option. In this case, the NUA will be
Taxed at ordinary income rates; 10% early payment penalty tax if you're not 55 or disabled Tax deferred until sale of stock distribution; not taxed again at sale Taxed at long-term capital gains rates regardless of holding period Taxed as long- or short-term capital gain, depending on holding period outside plan (long-term in this example)
Tax payable at sale--stock valued at $750,000 Cost basis-- $50,000 Already taxed at
Additional appreciation-- $250,000
*Assumes stock is attributable to your pretax and employer contributions and not after-tax contributions
subject to ordinary income tax (and a potential 10% early distribution penalty) at the time you receive the distribution. Stock held in an IRA or employer plan is entitled to significant protection from your creditors. You’ll lose that protection if you hold the stock in a taxable brokerage account. Holding a significant amount of employer stock may not be appropriate for everyone. In some cases, it may make sense to diversify your investments.* Be sure to consider the impact of any applicable state tax laws. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not in- tended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent ad- vice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable – we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. All investing involves risk, including the loss of principal. This discussion explains the tax treatment that may be available when employer stock is held in a qualified retirement plan. While the examples used in the discussion shows such stock increasing in value over time, it is important to understand that any shares of stock held in a retirement plan, including shares of employer stock, can lose some or all of their value over time.
* Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
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