Category Archives: Retirement Tax

Posted by September 12, 2018 Retirement Tax, Uncategorized No Comments

Net Unrealized Appreciation – NUA – 2018

Net Unrealized Appreciation – NUA – 2018

Net Unrealized Appreciation – NUA – 2018 occurs when an individual has invested in company stock within a retirement plan, such as a 401(k). NUA also refers to as a lump-sum distribution involving company stock. The NUA rules are different for 2018 because the tax rates changed.

Why is it Important?

An eligible taxpayer can save a significant amount of taxes by distributing appreciated stock to a taxable account.

Who is Eligible?

A person who separates from service by way of disability, or retirement if older than 59.5.

Please explain further in depth.

Under the typical NUA scenario, a person retiring from their company will have a 401(k) that holds their company’s stock. For example, you worked at FPL or HEICO Corporation for many year. During that time, you or the company acquired company stock in the retirement plan and its appreciated quite a bit. You will have to consider doing an NUA transaction within 1 tax year following the year you retire. For example, if you retire on November 30, 2018, you have until the close of 2019 to do an NUA.

You have three options.

  • (1) You can do nothing and keep your money at the 401(k) as long as they will do business with you.
  • (2) Take a lump-sum distribution from the 401(k) and roll the entire balance into a Rollover IRA, not taking advantage of the NUA.
  • (3) Make a lump-sum distribution from your 401(k). Distribute the shares of the company stock into a taxable brokerage account, and roll over the rest into a Rollover IRA.

Tax Consequences

If you take advantage of the NUA, you will immediately owe ordinary income tax on the original cost basis of the shares. The cost basis is what you paid for it, presumably long ago. Tax is due on the appreciated aspect of the stock when you sell it. The NUA constitutes the difference between the cost basis and the fair market value. the FMV is the exchange traded price, in many cases. If you later sell the company stock, any gain will be taxed as a long term capital gain.

NUA TIP: If there is any after-tax money  accumulated in the 401k, then a portion of these monies could be used to reduce the amount of the cost basis, which will lower the tax bill.

What happens to the stock after the NUA Transfer is complete?

The stock carries its cost basis from the 401k. However, when the taxpayer sells, he or she realizes a gain on the appreciation of the stock above the cost basis. Upon sale or liquidation of the stock, long-term capital gains apply to the sale proceeds at long-term capital gains rates.

NUANCE: The gain on the stock on the date of transfer is treated as long-term capital gain. The law deems it long-term. However, any subsequent appreciation of the stock above its fair market value on the date of transfer is treated as a short-term capital gain until 1 year passes from the date of the lump-sum distribution.

EXAMPLE: Assume a taxpayer distributes NUA stock on April 17, 2019. The stock had a cost basis of $10 and a fair market value of $22. Assume a tax rate of 37%. In 2019, the taxpayer owes ordinary income tax on the stock basis. The tax due is $3.70. The difference between the cost basis and the FMV is $12. This is the NUA. Assume the stock later appreciated to $23. Assume the Taxpayer sold it on April 23, 2019. In such a case, the taxpayer would also owe long-term capital gains taxes on the $12 appreciation, and short-term capital gains taxes on the difference between the $22 FMV on the date of distribution and the $23 sale price. The gain is not subject to the Additional Medicare tax. The custodians report the NUA on Form 1099-R and the subsequent sale on Form 1099-B.

When is an NUA ideal?

The NUA becomes attractive when you hold highly appreciated company stock in your 401k.

There are many IRS rules that govern a former 401k participants eligibility to use of the NUA transfer. It is important to consider these rules before making the decision to take advantage of the NUA transfer election.

Net Unrealized Appreciation – NUA – 2018

Net unrealized appreciation rules

Frank Duke Method

Net unrealized appreciation 401k

Posted by November 8, 2017 Retirement Tax No Comments

Missed Required Minimum Distribution? What to do…

Missed Required Minimum Distribution? What to do…

You missed the deadline to take a required minimum distribution from your qualified retirement plan. What do you do?

The deadline was December 31, 2017. You must take your first required minimum distribution for the year in which you turn age 70½. However, the first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year. A different deadline may apply to RMDs from pre-1987 contributions to a 403(b) plan.

What happens if a person does not take a RMD by the required deadline?

If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%. The account owner should file Form 5329, with his or her federal tax return for the year in which the full amount of the RMD was not taken.

Can the penalty for not taking the full RMD be waived?

Yes, the penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. In order to qualify for this relief, you must file Form 5329 and attach a letter of explanation.

What to do… take a correcting RMD as soon as possible. Then ask to have the penalty waived using Form 5329.

Posted by October 31, 2017 Individual Tax, Retirement Tax No Comments

Net Unrealized Appreciation – A Retirement Tax Saving Opportunity

Rollover your 401(k) and distribute your company’s appreciated stock via “Net Unrealized Appreciation” (NUA). This cuts your taxes in half from high ordinary rates (39.6% +) to low capital gains rates (0%, 15%, 20%). It also avoids the Net Investment Income Tax Rate (3.8%). I’ve heard enough, I want to schedule a call…

We’re in a Bull-Market right now, and stocks are likely moving even higher. This presents an excellent tax-planning opportunity for the company stock in your 401k. If you are a retiree, listen up. An important question to ask is how do I get the most out of my retirement account? Oftentimes the simplest factor is income tax. Unfortunately, clients often review income taxes after the end of the tax year. However, by then, its often too late. Nevertheless, income taxes are the most critical factor (aside from diversification) to keep in mind when making retirement decisions. Furthermore, the very decision to save in a retirement account is a tax arbitrage. You are choosing to defer income taxes for a later date, as well as avoiding capital gains taxes. So, it’s important to maximize every dollar of savings. Contact…

The NUA – Net Unrealized Apreciation.

A frequently overlooked and misunderstood retirement tax saving strategy is the use of a lump-sum distribution involving a distribution of employer-stock with Net Unrealized Appreciation (NUA). NUA is not widely known or understood because the IRS has published very little about it outside of its Treasury Regulations. Contact…

It works for employees who hold appreciated company stock in their 401k’s. To qualify, the employee needs to take a lump-sum distribution. Additionally, take the lump-sum distribution within 1-year from the date in which you have a “triggering event.” A triggering event is the date of retirement, disability, or separation. The trustee of your retirement account will distribute the NUA company stock into a separate taxable account. Federal income tax and early withdrawal penalties owed on the stock’s adjusted basis. The tax on the NUA is deferred and the employee can elect to include the NUA in income. Contact…

In conclusion, be aware: the NUA is not for everyone. Importantly, there are many pitfalls and traps for the unwary, such as improperly making the distribution. Thus, it is important to contact a tax specialist to guide you through the process. An analysis should be conducted to determine the tax ramifications, and the potential savings, for each unique situation. Contact…

With a little bit of planning, you could have a lot more money to spend in your retirement. Finally, we are available nationwide to handle your matter. Meet Charles.

Schedule Free Call