L1: choicesHere”s my situation. I want to retire at 55years and 1 day. I”m single and plan to roll about $320k into my 401k) which will have a combined total of about $1.7m. At present, the 401k) is 100% HIGHLY appreciated company stock with a low cost basis. The NUA strategy is very appealing to me but I”m not quite sure how I can go about taking advantage of this strategy. After talking with 3 financial pros, I am faced with a few choices. Lately, I”m leaning towards leaving my funds in my 401k) and taking monthly fixed installments. This strategy gives me the control I desire concerning the monthly amount and allocations. Another option discussed was to leave enough money in the 401k) to pay myself the desired yearly income I would want for 4 1/2years which would allow me to reach 59 1/2 and invest the rest using a pro who advises that he would invest in 7 or 8 IRA”s for the 4 1/2 year duration. The last option is to roll the entire 401k) into an IRA and set up a 72t. Is it possible to have several 72t accounts? Any thoughts?2008-06-21 23:26, By: Boit, IP: [22.214.171.124]
L2: choicesHello Boit:
NUA treatment of employer stock can bve very effective but it does have rules. In your case, with $1.4mm in stock you are looking at a tax differential of somewhere in the $150k to $200k range depending on the specific mathematics. In short, NUA treatment should be explored rigoriously and most likely adopted. Niw the rules: 100% of all of your assets in all company plans must be distributed in one calendar year to you in order to elect NUA treatment of the stock. Further, the stock must be distributed to you in a manner that creates a taxable event whereas all of the remaining assets can be rolled over to a rollover IRA. This being said, I think you are pretty much down to your last option; however, whether to have a SEPP plan or how many is not clear & is subject to a different set of analysis.
I suggest that you seek professional help as you have a mix of tax (NUA, LTCG, ordinary income) issues effecting / interacting with cash flow living issues.TheBadgerwjstecker@wispertel.net2008-06-22 07:45, By: TheBadger, IP: [126.96.36.199]
L2: choicesThanks for the reply. After giving it some more thought, suppose I reallocate a portion of these shares into the fixed income fund temporarily until I finalize separating from the company. Since I would want an income of $90k per month until I reach 59 1/2, I could leave $450k in the highly appreciated stock and once I leave the company, roll it over into a taxable brokerage account and roll the remaining over into several IRA”s using one of the pros I spoke with. Once I move the shares into the taxable account , I could sell enough shares to pay the cost basis and LTCG taxes for the year( I would start this strategy in january 2009). The IRA”s would not have to bee setup as a 72t because I will not take distributions until I reach 59 1/2. This strategy would allow me to take advantage of the NUA for 5 years and provide me with substantially more net income vs paying ordinary income via the 72t. Am I on the right course here or am I missing something obvious? Thanks again.2008-06-22 15:31, By: Boit, IP: [188.8.131.52]
L2: choicesDiversification is your greatest need, so the reallocation of 2/3 of the company shares is a good idea. It will still leave you with over 25% of your assets in the company stock. Be sure your official separation date is in the year your turn 55 or later, as that will eliminate the early withdrawal penalty on the cost basis of the NUA shares.
Meanwhile, get a cost basis quote from the plan and also find out if they allocate the cost basis differently from the average cost method. If they do, have your reallocation to fixed income come from the higher cost shares and save the lower cost shares for NUA. Also, check if you have any after tax basis in the 401k. Doing the LSD in 2009 will also probably spread your income more evenly over the two years, but you must be sure to complete the distribution of all plans of similar type from the company in 2009. The direct rollover to a TIRA is the best method to do that. While you will still have the flexibility to start a 72t plan later if needed, that need is unlikely.
If you take your LSD in 2009, your triggering event will be separation from service. If you happen to separate in 2008, do NOT take any distributions in 2008, since intervening distributions will destroy your LSD for 2009and you would have to wait until you were 59.5 to get a new triggering event. Hopefully, the people you are working with are aware of all these rules, as many “pros” are pretty clueless on NUA issues.
Finally, you are probably aware that if the Democrats take over control of Congress and the White House in the elections, that your 15% LT cap gain rate COULD disppear as early as July, 2009. It could go to 20% or even higher and very few states have any breaks for LT gain taxes. So you may have to adjust your strategy somewhat as you go.
2008-06-22 17:12, By: Alan S., IP: [184.108.40.206]
L2: choicesThanks Alan.
I”m pretty much up on most of the acronyms but I don”t know what the LSD is an acronym for? I think you were referring to making my distribution, right? At any rate, I”m separating from the company the day after my 55th birthday so that base is covered. I was intending to roll the pension into the fixed income fund of the 401k immediately and then leave everything as is in the 401k for the rest of the year and makeup my income for the remaining 3 months of 2008 by electing the fixed installment plan. I will contact the plan adminstrator next week to see if they will allow me to the use the real cost basis for the highly appreciated shares vs an average. Since I made that one-time large purchase of company share in 2006, it should be easy to document. Yes, I”m very much aware of the possible huge hike in LTCG”s proposed by the democrats. One of the pros I talked with spent 2 1/2 hours with me discussing my options and he”s very much aware of the 72t rules and the NUA strategy. His final advice on the NUA was that he didn”t reccomend making choices based on a tax stratgey. That may be good advice if one has just a tiny amount of highly appreciated shares but in my case, the tax savings could be substantial as pointed out above. Thanks for the input as this has given me ideas to fine-tune my strategy. Any other advice is welcomed and appreciated. This is a great site for people who are nearing retirement and need info! AHHH! It came to me. LSD = Lump Sum Distribution. 2008-06-22 17:35, By: Boit, IP: [220.127.116.11]
L2: choices1. Eliminate the “advisor” who recommended rolling over your 401-K into an IRA. He is clueless !!!!
2. Once you take an LSD (Lump Sum Distribution) of your “HIGHLY” appreciated 401-K shares by transferring them into a regular taxable brokerage account, you can selectively sell some or all of those shares, and pay capital gains taxes based upon the company”s cost of those shares. I have used another approach whereby we set up that account as a MARGIN ACCOUNT, and borrowed against the value of the account until the following year because of the salary already received in the year of retirement. In our case, we were able to shift the capital gains into a 15% taxable income year, with a 5% capital gains tax rate. Under current tax laws, the 15% tax bracket taxpayers pay ZERO capital gains tax rates, so it is something for an astute advisor to consider.
3. Use these and your other options in a coordinated plan to get the results you want by using various aspects for the cash flow you need for the next few years until reaching 59 1/2 when there are no restrictions or limits on IRA distributions.2008-06-23 09:49, By: dlzallestaxes, IP: [18.104.22.168]
L2: choicesThanks for that info, dlz. You”ve thrown me a curve as I am totally in the dark as to what you”ve described. I”m far from being an astute investor but I”m trying to gain knowledge as quickly as possible. Could you go into more detail? I”d greatly appreciate it.
Boit2008-06-23 18:19, By: Boit, IP: [22.214.171.124]
L2: choicesGood morning Boit:
In one of your posts you stated that you needed “$90k per month.” I hope this is a typo since you would be almost broke within 12 months. My guess is you need $9k per month.
I agree with Alan that you need to work on investment diversification since you have such a high concentration in company stock.No matter how “great” a company is, their stock goes through periods of greatness and lousey over time. Remember Enron and Worldcom?
I also agree with you that you need to take into account the tax aspects of your situation. It sounds like the planner who spend 2 1/2 hours with you may be your best choice for advice. He probably has a relationship with a tax professional to coordinate all aspects of your situation so you can get the best plan possible.
The bottom line is thatyou have both a tax and investment / cash flow delima, and it will take sound planning to solve all of the problems to your best advantage. DIY is not a good option for you, but having a good understanding of what”s going on will be your best course of action.
Jim2008-06-24 07:09, By: Jim, IP: [126.96.36.199]
L2: choicesThanks Jim
I didn”t catch my mistake. I meant $90K per YEAR. Sorry.I definitely need professional assistance and advice as this is well beyond my scope of knowledge and ability.
Boit2008-06-24 08:56, By: Boit, IP: [188.8.131.52]
L2: choicesWhich item was the “curve ball” — # 2 or #3 ?2008-06-24 13:38, By: dlzallestaxes, IP: [184.108.40.206]