When you retire, you're frequently informed to roll-over your company retirement account - such as your 401(k) - into an IRA or into another company's qualified plan if you decide to continue working. Sometimes, that is not the best advice for tax savings.
Nonetheless, what ever you are doing - don't rollover any of your company's stock you own within the company's qualified plan. There is a big tax savings in the event you comply with this advice. That's simply because employer shares will get a better tax treatment if they are NOT rolled over.
Anything you roll into an individual retirement account is going to be taxed at your ordinary income tax rate when you withdraw it. Ordinary income tax has the highest tax rates with marginal tax rates going to 35%. If you roll-over that company stock, it'll lose its prospective special tax treatment and be subject to taxes as ordinary income like everything else in your individual retirement account. So you blow significant tax savings if you make the wrong choice.
So upon leaving the company, ask that shares in your employer, which you hold within your retirement plan, be distributed to you. You'll have to pay ordinary income tax on the amount you initially paid for the shares (the original price is what IRS calls the 'basis'). But ideally, the stock's worth has appreciated substantially since you bought the shares. And as you will see in a minute, these choice yields significant tax savings.
The difference between the stock's current market value and your tax basis in is the 'net unrealized appreciation' (NUA). This NUA is the profit you will have if you sold the stock immediately. But if you did, you'd be taxed on the gain at the reduced 'long-term' capital gains rate in spite of how long you owned that stock since it's all treated as being held long term. Therefore, the tax savings on the gain is difference between your ordinary income rate, up to 35% if these shares were rolled to an IRA and eventually taxed on withdrawal, and 15% the capital gains rate. This huge and special tax savings is available only on the shares of stock in the company which employs you.
You can wait on selling the stock - maybe sell it in portions as time passes. And then you still solely pay at the long-term capital gain rates. For example, suppose an employee buys $50,000 worth of employer stock in his 401(k) plan through the years, and it grows in value to be worth $500,000 by the time he is ready to terminate employment. If that stock is rolled over to an IRA, it'll be subject to taxes as ordinary income at a rate of up to 35 percent when he withdraws it from the IRA. No tax savings there.
In the event that, on the other hand, he takes a distribution of that stock from the plan, he could be subject to taxes at normal income tax rates on his original buy of $50,000 in the year of distribution. However, there is no present tax on the $450,000 of stock appreciation (i.e. gain or NUA) until he actually sells any stock! And when he does sell it, he'll be taxed on that gain at the long-term capital-gains rate of only 15 % (presuming current rates do not change).
Tax savings when making the proper choices with your retirement accounts may be significant.
You Pay More Taxes Than NecessaryAnd we guarantee your CPA has never told you The problem with paying taxes is that most people overpay. So if you are concerned about having enough in retirement, you must stop overpaying taxes. I know you think your CPA takes care of this for you. WRONG. I AM a CPA (retired) and I can tell you that 90% of CPAs do nothing more than enter your information into the little boxes on the tax return but NEVER tell you how to pay less next year. Why? Many of them simply do not know what we can show you. In ten minutes.
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