Company Stock NUA Election Saves Taxes
You can save taxes when you have appreciated company stock that you plan to distribute in the short term. You can save the difference between the ordinary income tax rate and capital gain rate.
Here’s the way it works. If you are separated from service, reach age 59 1/2, become disabled or die, you are almost there. Next you need to take all the actual stock shares, move all the vested company balances in your plan and all assets from all qualified plans within one year.
You will be taxed at ordinary income tax rates on your cost in the shares in the year of distribution. Whenever you sell the company shares you will pay tax on the appreciation at long term capital gain rates which are at best 20%. You may have the 3.8% medicare tax on the capital gains if you are in the 39.6% income tax bracket.
Keep in mind the distribution must be from a qualified retirement plan such as a 401(k), pension or profit-sharing or stock bonus plan. IRAs’ do not qualify.
The IRS strictly enforces these rules. So if you don’t meet one of the rules above, you will be taxes at ordinary income tax rates plus penalty and interest.
This may not be an appropriate strategy if you were planning to hold the shares say in your IRA rollover for a long time horizon to benefit from tax deferral. It makes more sense for shorter term distribution plans.
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