Many companies offer company stock as a type of profit-sharing bonus in order to encourage company stock ownership for employees. This is typically rewarded to employees within their 401(k) or other retirement account. Unfortunately, as with all 401(k) distributions, withdrawals are taxed at ordinary income rates. To combat this, the IRS allows for the capital appreciation of the stock to be taxed at long-term capital gains rates, as long as certain requirements are met. Read on to see if you could qualify for a NUA.
Do you have employer issued stock in an employer retirement plan?
If you have no company stock, you won’t be eligible for an NUA distribution. If you do have appreciated company stock in a retirement plan, read on.
Is it phantom stock or stock options?
Unfortunately phantom stock and stock options are not eligible for NUA treatment. If you have other company stock, read on.
Do you have investments in the retirement account, other than employer issued stock (such as mutual funds)?
NUA distributions require the entirety of the account to be distributed, but non-qualified distributions from retirement funds could trigger taxes and penalties. To avoid this, roll all non-employer stock to a Traditional IRA.
Was part or all of the employer stock distributed in-kind to a taxable brokerage account?
To be eligible for the NUA distribution, the employer stock must be distributed directly to taxable account. Additionally, the distribution must occur after one of the following events to be eligible: death, disability, separation from service, or reaching age 59.5.
If you meet all of the above requirements, you will be eligible for a NUA distribution. Check out this flowchart to learn more.
NUA distributions can be complicated and difficult to coordinate with the retirement plan sponsor. Numerous mistakes can be made in the long process that will disqualify you from receiving NUA treatment. If you have questions regarding NUA distributions or retirement planning in general, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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