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A lump-sum distribution from a company retirement plan that includes employer stock gives you the unique opportunity to convert taxable income into a long-term capital gain. You can do this by electing to create net unrealized appreciation (NUA) on the appreciated value of company stock that is in excess of what you paid for the stock.The net unrealized appreciation distribution strategy typically includes three components:

Average Cost Basis represents what your com­pany's 401(k) or other retirement plan paid for your shares. This component is taxed at ordinary income tax rates when the shares are distributed from the plan.

Net Unrealized Appreciation is the difference between the average cost basis and the stock's fair market value when your company shares are dis­tributed. This component is always taxed at long-term capital gains rates at the time of sale, unless you specifically elect to pay the tax at the time of distribution.

Additional Appreciation is the difference between the fair market value of your company shares at the time of distribution and the price you receive when you dispose of the shares. The additional appreciation will be taxed as short-term or long-term capital gains depending on how long you hold the shares after they are distributed to you from the plan.

In order to create net unrealized appreciation, you need to pay ordinary income taxes on the average cost of the shares at the time of distribution. At your option, you will be able to defer all tax on the dif­ference between the current fair market value and the average cost (the difference is the NUA) until the shares are actually sold. When you sell shares, the net unrealized appreciation will be taxed at the long-term capital gains rate. Any appreciation between the sale price and the distribution value will be taxed at long-term or short-term capital gains rates depending on how long the shares are held after distribution to you from the plan.

Only employer contributions and pretax employee contributions are eligible for this net unrealized appreciation tax strategy, and only if they are distrib­uted as a lump-sum distribution.

With our experience working with many publicly held companies, we are very well suited to help you make this decision. This will require the preparation of a complex model, that we have designed, taking into account several variables. Please go to Financial Planning for more information.

 

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