Company Stock Dividends

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L1: Company Stock DividendsI plan to start an SEPP in which the associated IRA will be comprised solely of company stock shares held in a custodian brokerage account. If I continue to have the quarterly stock dividends reinvested, will this be considered adding additional funds to the existing IRA and thus be a violation of the 72(t) rules? In that this essentially serves as a “deposit” of fresh money into the IRA every three months, I want to make sure that I don’t do something that would bust the SEPP account.2010-06-21 00:51, By: DHE56, IP: [75.166.73.167]
L2: Company Stock DividendsBe careful of terminology. I believe that you mean that you will be receiving CASH DIVIDENDS on company stock, that you will be using to buy more shares of the company stock. ( “Stock Dividends” are additional shares that are distributed by the company, often in lieu of cash dividends.)Either way these do not count as “additional contributions”. These are earnings, the same as interest would be.However, if these shares are now in a 401-K or a company retirement plan, and they have appreciated significantly over the years, you should ask the company about NUA ( Net Unrealized Appreciation Employer Stock), and if so, you could save considerable taxes by NOT rolling these shares over to an IRA.Furthermore, you should consider that you may be concentrating too much of your “wealth” all in one company. In addition to your retirement plan, if you are still working there, you might look at what happened to Enron, Worldcom, the auto and financial services industries in recent years.Give us more details so we can help to guide you, or retain a financial advisor or tax specialist.2010-06-21 03:38, By: dlzallestaxes, IP: [72.78.110.86]

L3: Company Stock DividendsYou’re correct in regard to my ambiguous terminology. I did, in fact, mean to refer to cash dividends that would be reinvested to purchase additional shares of company stock. You’re also correct in that all of the shares are currently held in a company 401-K plan. I have not been employed by this company in 12 years, but I choose to leave the shares in the company’s administered 401-K plan when I severed service, as opposed to moving the shares to an IRA account.As for the NUA that you mentioned, I must admit that I know very little about that. I have seen references to it in the past, but it seems as though I remember reading that this only helps if you anticipate being in a high federal income tax bracket once you retire. Is this correct? My tax bracket after I retire (and during and after the time period in which I plan to begin the SEPP plan) My cost basis is relatively low in that I started purchasing the stock in 1985 and stopped in 1998. It pays a very healthy dividend so I would like to continue to hold the shares.2010-06-21 17:19, By: DHE56, IP: [64.92.217.182]

L4: Company Stock DividendsI suggest that you go to the library, or a superbook store, and look at J K LASSER “YOUR INCOME TAX 2010”, pages 163 & 4, section 7.10. It is a “user friendly” explanation of NUA.In most situations of significant appreciation, taxpayers save a lot of taxes. ( I saved one client over $ 100,000 in taxes.)In addition to the NUA nuances, there is additional planning as to the timing of when it would be advantageous to sell these securities if you are in the 15% tax bracket for 2010, because the appreciation can be “tax-free”, or at least taxed at the 15% capital gains rate, rather than the 25%-35%, or higher, ordinary tax rate when you take distributions later. Further, your dividends could be tax-free if you are in the 15% tax bracket now, vs. ultimately paying taxes at 25%-35% when you take out these dividends later from your retirement account.This planning is best to be done with an experienced tax accountant or financial planner who understands these aspects.2010-06-21 17:40, By: dlzallestaxes, IP: [72.78.110.86]

L5: Company Stock DividendsHere is a link discussing use of the NUA tax treatment:http://spwfe.fpanet.org:10005/public/Unclassified%20Records/FPA%20Journal%20February%202004%20-%20Contribution_%20Revisiting%20Net%20Unrealized%20Appreciation_%20A%20Tax-Wi.pdfHowever, note that diversification always trumps tax benefits. To that end, there may be an advantage to combining NUA with a lump sum distribution of other 401k assets to an IRA. You could then set up a SEPP plan from the IRA that would produce enough income to supplement your income from the sale of NUA shares. Most plans use average cost accounting when quoting your NUA cost basis, but it is worth asking if they also are able to calculute different cost basis figures for different lots of stock. You could then elect the lowest cost shares for NUA, and sell the higher cost shares in the plan before rolling over the cash proceeds to an IRA. This would immediately improve your concentration of assets by half.Any split that seems to work best can be used, but first you would need to get a cost basis quote from the plan administrator. If you separated before the year you turned 55, then the cost basis amount would be subject to the early distribution penalty until 59.5, but not the NUA value. Obviously, not knowing the future of cap gain tax rates after this year makes planning more difficult. Perhaps the top rate will remain at 15% if your total bracket stays below 25%, but the campaign tax promise for those with incomes under 200 or 250k probably has a limited shelf life.2010-06-21 21:28, By: Alan S., IP: [24.116.165.60]

L6: Company Stock DividendsCorrect. The 401-K assets/investments that are not NUA employer stock, or are high cost employer stock, would be sold and/or transferred to an IRA. Only the low cost NUA employer stock would be DISTRIBUTED IN KIND (i.e. the shares themselves are distributed, not sold in the 401-k). After the DISTRIBUTION OF NUA SHARES to a non-retirement regular brokerage account, the shares can be sold the next day, or whenever you need money, and they are taxed as long-term capital gains. You can even arrange for your regular brokerage account to be a margin account and borrow against it without incurring the capital gains tax by not selling the shares until later.2010-06-21 22:39, By: dlzallestaxes, IP: [72.78.110.86]