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What’s the Best Way to Handle Your Company Stock?What's the Best Way to Handle Your Company Stock? It's common that future retirees pick year end as the time to call it quits. If you've recently retired or you're counting the days, how you decide to take distribution of your 401k, TSP or Profit Sharing plan can make a major difference on the amount of taxes you may end up paying. Especially if you're holding company stock in your retirement plan. At retirement it's common for investors to rollover their company stock from their 401k or Stock Bonus Plan to an IRA, without much thought. In most cases this is the best route to take. However, there are certain circumstances that may make another option more effective and less taxing. Many retirees and often their tax advisor fail to consider the â??net unrealized appreciationâ?? or NUA option available with company stock. The concept is not very complicated, but if used properly it could make a big difference in your retirement income down the road. Hereâ??s how is works: Say you own $200,000 in your firmâ??s stock in your 401(k) plan and you plan on retiring at age 60. The average cost basis for each share is $20 and the stock is currently worth $50 a share. Most would roll over the stock, along with any cash or other investments inside the account, into an IRA and let it continue to grow tax deferred. However, when you begin withdrawing funds, they will be subject to ordinary income taxes. The IRS allows you to pay long-term capital gains tax on the increase in your company stock value (maximum15 percent federal tax). By rolling the stock to an IRA, you lose this tax saving opportunity. An estate planning downside to the IRA is that when you die, your heirs won't receive the company stock with a step-up in basis. In other words, they'll pay ordinary income taxes on the value of the stock at the time the IRA owner dies. However, there are several techniques you can deploy to stretch-out and minimize the tax bite. An alternative is to roll over the cash and other investments into an IRA, but have the stock distributed directly to you. This must be done before you start income distributions, and must be done simultaneously with the IRA rollover. In other words you'll lose the NUA option if you roll your company stock into your IRA and then decide to withdraw all or part of the account. As you probably figured out that means it's going to be taxed immediately in the stock distribution. Yes, it will, but probably less then you think. And the long-term tax benefits could be substantial. Youâ??ll be taxed at your ordinary income tax rates on the cost basis of the stock, $20 in our example. If you donâ??t sell the stock, that's the only immediate tax you'll pay. On the other hand, you may want to sell some or all of the stock immediately, perhaps to diversify your portfolio so itâ??s not so heavily concentrated in a single stock or because the stock's future prospects aren't good. In this case, in the year the sale is made you'll pay long-term capital gains on the net unrealized appreciation (NUA). This is the difference between the cost basis and the value of the stock when you received the distribution. In this example, that's $30 ($50 â?? $20). The long-term capital gains rate applies on the NUA regardless of how long you hold the stock before selling. Say you hold on to the stock for a while before selling it at $75 a share. That additional $25 gain will be subject to the same 15 percent capital gains tax, provided you hold the stock for more then a year. In contrast if you roll the stock into an IRA you avoid all taxes on the transfer, however as I mentioned earlier all the distributions will be taxed at your ordinary tax bracket (typically 28 percent federal). As you can see depending on the value of the company stock the tax saving could be substantial. When it comes to the estate planning implications of this strategy, things get a bit more complicated, and sometimes they've been misreported in the press. Many have reported that if you hold the stock until death the heirs will receive it with a step-up in basis. To correct this misconception, there is no step-up in basis on the NUA portion, the $30 gain in our example. However, any future appreciation above the NUA portion, $25 in our example, does receive a step-up in basis at death. I told you it was a bit complicated! Everyone's situation will be different, before committing to this little-known NUA strategy, run it by your financial advisor. The decision to do it or roll it over into an IRA or other strategy will depend on several factors, such the amount of the NUA, whether other investment alternatives are more likely to appreciate better than the company stock, whether you want to sell quickly to pay for retirement or whether you want to leave the shares to your heirs. Also check with your benefits department at work, well in advance. Some plans donâ??t allow separate distribution of company stock, and some departments are not familiar with the NUA strategy. It's wise to seek financial advice prior to retiring and making decisions regarding your retirement plan. Andy Barkate is the President of California Retirement Plans, LLC a local investment and retirement planning firm with offices in Bakersfield, Lancaster and Ridgecrest. Your questions and comments are welcome at 760-371-2115or e-mail at abarkate@calfinancial.com or http://www.calfinancial.com Home Page http://www.retirement-retirement.com. 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