May 14, 2019Individual Investment Management

Be Careful with Company Stock
Understanding rules can save you thousands!

As a form of compensation, many managers and decision-makers are awarded shares of stock within their qualified plans in lieu of income.  This is a welcome perk but can inadvertently cause you additional liabilities down the line if you're not careful.  Read on...

Minimize Your Tax Impact:
All investments are not the same when held in qualified plans.  401k or other qualified plans that contain individual shares of publicly traded stock must be examined before rolling the plan over to an IRA post-retirement.  (IF you choose that route - it's not always required to do so.) 

An IRS Solution:  NUA Rules
The IRS has special rules that allow you to transfer those shares of stock from your plan to a traditional brokerage account (read: not an IRA).  Doing so will allow you to enjoy lower tax rates on the gains portion of those shares rather than having to claim income tax on the entire distribution.

But Please Remember!...
When using NUA rules, it is recommended that you work with an accountant who understands the rule and also examines the cost basis of the shares.  The practical application for NUA distributions is to scrutinize the cost basis of the shares and select the lowest cost basis shares for the distribution to be most valuable.  This is important because that cost basis will represent taxable income to you in the year of the distribution - which is why you want this to be as low as possible!  When you sell the transferred shares, the gains in value will be taxed as capital gain rather than income from an IRA.  (Cap gains rates are lower.)  Any shares you do not transfer to a traditional brokerage account will be rolled to an IRA as is customary.