NUA

L1: NUAQuestion. I had found this site awhile back and submitted a question regarding my 401k balance and received some excellent advice. Alan S submitted the one below, which has me writing again. My question is: Currently I have about $70,000 in stock with my company which has been give to me over the past 32 years (company match stock for $$ I put in). In my 401k plan, I have option to move this amount and re-invest in other funds, such as asset allocation, mid/small cap stock, global equity, interest income, etc. I have never moved this before, so if I do so, how would it affect getting a quote of the cost basis? Would I need to get this figure before I move it to other funds? I will be 58 in Dec. and may be leaving my job (through down sizing).
“NUA on any highly appreciated employer shares; with 32 years with the same company, this could be a near bonanza for you. Attaining age 59.5 is a new qualifying event for NUA. This would be part of a lump sum distribution. You would ask for a quote on your cost basis so you could analyze the NUA option”.2006-10-02 10:36, By: ken, IP: [144.160.98.31]

L2: NUAGood morning Ken:
The keys to utilizing the NUA special rules for highly appreciated stock lies in the amount of appreciation you have in the stock and the amount of stock you have. To determine the amount of appreciation, check with your company. You may have to go on a real hunt but you will be able to find the right person who can provide you with this information. Once you answer this question, then you need to evaluate whether trying to utilize this option makes sense in your case. If the current stock value and its cost basis are relatively close,then it may be to your advantage to just mix the $70k in with your other investments in the K-plan and pay tax at ordinary income rates. For example, if when you begin to withdraw from your retirement assets along with other income your may have, if you are paying an effective tax rate ofunder 10%, then why lock yourself into paying capital gainsof 10%. This is a tax-evaluation planning issue.
Once you figure out the above issues, then you will know whether to sell the stock (withing your K-plan) and use the proceeds to diversify into other investment options your have. HOWEVER, once you sell the stock and reinvest, you lose the NUA option. So do your homework before making this decision for diversification.
Jim2006-10-02 11:15, By: Jim, IP: [70.184.2.72]

L2: NUAKen,
Confirming as Jim did that once you either exchange your company shares within the plan OR transfer them in kind to an IRA, the NUA option is permanently lost. Therefore, get the quote by all means before you do anything. I have seen cost basis as low as 4% of current market value. And don”t overlook any spin offs from employer shares which also qualify for NUA. The spin offs are often compelling since once a spin off is complete, you would not be acquiring any more shares in that company other than dividend reinvestment, and not adding new shares for many years means that the average cost is not increased by more recent purchases.
With respect to the cap gain rates, you could sell the shares as soon as they reach the taxable account without a 12 month waiting period to qualify for LT rates. Those rates would be 15% for gains in your 25% or higher bracket, and only 5% for gains in your 10 or 15% bracket. Therefore, many early retirees can sell these in the year following retirement when they have little other income at the 5% rate. Finally, as you have probably seen, if the company is solid, you still should be concerned with diversification, and if not solid even more so.2006-10-02 18:40, By: Alan S., IP: [24.116.68.91]

L2: NUANUA (Net Unrealized Appreciated) is a very complex area, but a very experienced tax professional can save you a lot of money. In addition to the initial, and future, tax consequences, there is important timing issues that can help save even more.
For example, usually a taxpayer receives considerable income in the year of termination/retirement because of the regular salary, possible severance pay, accumulated vacation and sick pay, etc. By taking the company stock from the retirement plan, it is taxed as additional ordinary income ON THE COST OF THE STOCK CONTRIBUTED BY THE COMPANY TO THE PLAN, usually as their matching of the employee contribution, or just the company”s contribution. So, if the company cost in your case was $10,000 and it is worth $ 70,000, then you pay taxes currently on the $ 10,000. All of the shares of stock are distributed to you (say 1,000 shares @ $ 70 market price). If this happens early in the year, and you don”t have much other income, you could be in the 15% income tax bracket. You can sell some, or all of the shares, and pay taxes at capital gains rates on the $ 60,000 in growth. If you are in the 15% income tax bracket, then thesecapital gains are taxed at 5%. If you are in the 25% or higher income tax bracket, then the capital gains are taxed at 15%.
If you are in the 25% tax bracket already, but need some of this money, you can have your broker put it in a “margin account”, and borrow against it rather than sell it, during this first (or multiple) years. When you are in the 15% tax bracket, you then sell the shares, and pay taxes at 5%. By this planning, you can save $6,000 in taxes ( $ 60,000 x 10% differential in tax rates).
Be careful to make sure you are “separated from service”, and do not become an independent contractor to your former employer, because this could void the NUA treatment.
(With this comprehensive planning I saved a new client $ 100,000 in taxes by using the NUA approach. Your situation will not be as dramatic, but you might as well save the taxes. I”m sure you”ll spend it better than our government.)2006-10-03 21:20, By: dlztaxes, IP: [4.175.9.132]

L2: NUALet me add one additional point to DLZ”s excellent comments. If you determine that you are going to utilize the NUA option, be careful when you start the process. Based on comments from Ed Slott, CPA,the recognized IRA expert to the industry, if you tried to do it this year with today being 10-04-06, you are probably too late to get it done. Sinceall steps in the processhave to be done within the same calendar year, do not take the chance that you can complete the process before 12-31-2006. I believe Ed”s guidance is to start no later than about August or September. I”m sure DLZ can confirm or modify these dates with authority, especially since he is a CPA and has done this process several times.
Good luck.
Jim2006-10-04 08:32, By: Jim, IP: [70.184.2.72]

L2: NUAJIM, EXCELLENT POINTS. Actually, I think there is plenty of time to get “all of the plans in order” to do it before year end. You must start with getting the employer cost info first in order to consider the tax ramifications. HR (Human Resources) should be able to provide that in a week or 2. Simultaneously, get the ditribution forms from the company retirement plan, and figures from them as to all of the relevant numbers of shares and values currently. Also, watch your timing as far as the current year”s employer contribution so you don”t miss getting it. Also, take a look at your 2006 vs. 2007 projected tax picture.
In the major situation I had, we actually purposely delayed submitting the papers to Fidelity until January in order to get it into the following calendar year which lowered the tax bracket from 35% to 15% on the regular income tax side, and from 15% (actually 20% at that time) to 5% on the capital gains AND QUALIFIED DIVIDENDS aspects for the next year(s). Plus, the margin interest was deductible against INTEREST INCOME that was taxed at regular rates, and brought the taxable income left down to the 15% tax bracket. We actually took IRA distributions at 15% by rolling them over to ROTH IRAs, on which all future growth will never be taxed to the taxpayer, surviving spouse, or children and grandchildren when they inherit it.
FINALLY, the fact that I”m a CPA is not as significant as the need to find a TAX ADVISOR who can think outside the box, and is hopefully knowledgable or experienced in the NUA area, or if yours is willing to do a lot of research to “come up to speed”.2006-10-04 11:43, By: dlztaxes, IP: [4.175.9.247]

L2: NUAHello Ken:
As several people have poited out, electing NUA treatment of employer securities is a somewhat tricky & unless you feel very well informed & confident I would suggest you seek professional help — just to make sure it happens right.
NUA treatment of stock starts to get interesting when the current market value per share is 2 to 3 times or more your basis. Over 32 years this is potentially very likely. Whomever runs your 401(k) plan absolutely must have your basis computation and they must give it to you promptly — its the law. This basis may be expressed as an aggregate $$ amount or a $$.$$ per share; either is fine. In fact, I have sometimes seen the basis numbers printed on quarterly participant statements or it may be available electronically depending on the sophistication of your plan.
Regards
TheBadger
wjstecker@wispertel.net2006-10-04 17:12, By: TheBadger, IP: [72.42.67.160]