Knowledge is Power: "How I Helped a Client Give Himself a Raise at Retirement".
Do you own shares in the company where you work? Is your company Public or Private? Would you like to know more about a strategy that will help you gain control of the assets you own and pay less for them? Let me teach you about: Net Unrealized Appreciation or NUA.
Recently, I had a client that was retiring from a publicly traded company who had amassed quite a large position in company shares in his ESOP Plan among other assets that he invested in for savings at retirement. As we discovered, this client was interested in taking control of his assets and performing a ROTH Conversion to reduce his tax burden and potentially live tax free for the remainder of his retirement. This is when we introduced Net Unrealized Appreciation, or NUA for short, to complement his ROTH Conversion.
Net Unrealized Appreciation “relates to distribution of appreciated employer securities from and eligible employer- based retirement plan”. Typically, when someone has accumulated company securities and takes a distribution from the plan, they pay “ordinary income” tax rates on the total distribution of the assets, a big tax bill, right? With Net Unrealized Appreciation, we can show you how to reduce the tax burden while maximizing the value of the securities you own. But first, it is important to remember a few things while taking an in-kind distribution of your securities as part of a lump sum distribution. (1) You must be eligible to take a lump- sum distribution from your plan, usually due to separation from employment, disability, or attaining 59 ? years of age, (2) You must receive the distribution of the company stock directly from your workplace. The NUA rule cannot be used if you roll the stock over to an IRA, then liquidate it, (3) You must be able to pay income tax on the cost basis of the stock distributed in kind in the year in which it is taken.
Now that we have the parameters set, this is how it potentially works. When utilizing the NUA Strategy, you take a lump sum distribution of all the assets in your employer sponsored retirement plan. The employer stock is distributed in-kind and is usually moved to a brokerage account, while the rest of the assets may be rolled into an Individual Retirement Account (IRA). At this time the NUA is the difference between the price you initially paid for a stock (its basis) and its current market value. Because you transferred the company stock into a brokerage account in this manner, you will now only pay ordinary income tax on the basis at which the shares were purchased, not the amount gained since you purchased the shares. Moreover, any subsequent sales of these shares at a future date are taxed at capital gains rates, rather than ordinary income tax rates. Does this make sense?
As an example, say you worked for a company and obtained 1,000 Shares of company stock at $6.00 per share and the current market value is $140.00 and you are in the 32% Tax Bracket.
If I were to roll the assets of the retirement plan over to an IRA and withdraw the assets for retirement for income or due to Required Minimum Distributions (RMD), not utilizing an NUA Strategy, it would look something like this: ($140,000 * 32%) = $44,800 in taxes owed.
If we were utilizing an NUA Strategy, it would look something like this: ($6,000 * 32%) = $1,920 then subsequent distributions ($134,000*20%) = $26,800
Potential Tax Savings: $44,800-$26,800= $18,000
I understand that this strategy can help some individuals, but not everyone is suited for a strategy such as NUA. So, it is very important to have an experienced professional working in concert with a tax advisor to execute the example described above to make sure it is in the best interest of the client.
I hope you enjoyed this initial article of Knowledge is Power, and I hope it helps describe some of the work we do as financial advisors to assist our clients in maximizing what they have worked so hard to save.
Peter S. Hiltz, AAMS
Partner Wealth Manager
Kingsview Partners
Investment Advisory Services offered through Kingsview Wealth Management (“KWM”), an SEC Registered Investment Adviser. Insurance products and services are offered and sold through Kingsview Trust & Insurance Services (“KTI”), by individually licensed and appointed insurance agents. Kingsview Wealth Management does not provide tax advice. The information was prepared for informational purposes only, is not intended to provide, and should not be relied on for tax advice. You should consult your own tax advisor.