to 72t or not

L1: to 72t or notI have a client 55 yrs old about to be severed from his company. $1.5MM in plan (about 90% in company stock with average basis well below 35%). Wants $55K per year income and capital preservation
My question is rather than 72t a portion and lock into a yearly fixed amount of payment for 5 years. Wouldn”t this individual be better served moving most of the stock via NUA even paying short term capital gains on a portion of the NUA to pay the taxes due and 1st year income needs? (note: I realize that a hedging program re: the company stock will need to be initiated in the NUA to lessen the stock drop)2007-12-20 05:53, By: Levy, IP: [170.74.0.41]

L2: to 72t or notHello Levy:
This is a more complex situation than normal and can only be solved by building a multi-year spead sheet taking into account all of the your client”s individual tax circumstances.
Keep in mind that to use the NUA exception requires the creation of a taxabvle event; e.g. if he has $350,000 in stock (at the trustee”s basis) then he will owe approx. $100,000 in ordinary income tax plus an additional $35,000 in early withdrawal penalty. Then when he sells the stock for $1.35mm or so he will owe an additional $150,000 in long-term capital gains; total tax bill approximating $285,000; somewhere around 20% to 21% when all done. This sounds like alot but may actually be less than treating all $1.5mm as ordinary income over the years.
As I said, this needs to modeled out solving for the maximum terminal after-tax value usually five or so years in the future.
TheBadger
wjstecker@wispertel.net
2007-12-20 06:04, By: TheBadger, IP: [72.42.66.180]

L2: to 72t or notThx Badger
I am in the process of slotting all of the individual stock purchases with their basis, but it just appears to me that generating income until the person attains 59.5 using the NUA will provide more flexibility than a 72t.2007-12-20 08:22, By: levy, IP: [170.74.0.42]

L2: to 72t or notThere should be no early withdrawal penalty on the cost basis since client will meet the age 55 separation exception. But keep in mind that if the stock falls in value, it is the LT rate NUA that disappears, and that cost basis becomes a higher % of the FMV.
With respect to cost basis accounting, most plans use an average cost basis for all company shares, or may offer various alternative lots based on periods of time acquired, but the employee will typically have no input into the cost calculation method. There is also some debate where lower cost basis lots can be segregated, whether the higher cost shares must be sold in the plan or can be rolled into an IRA and sold in the IRA for diversification purposes. But there are definite planning opportunities involving taking only a modest amount of the company shares into the taxable account for NUA, and doing a direct rollover on the rest of the assets.
I agree that we do not have enough info here, other than to point out the obvious that diversification out of this concentration of company shares is paramount vrs tax considerations. There are probably a few hedging techniques that can address this without selling most of the shares ASAP, but something obviously needs to be done.
Not sure of the reference to ST gains on the NUA. The NUA is always long term, but additional gains in the shares that are sold in the first year after distribution would be subject to the ST gain rate.

2007-12-20 20:47, By: Alan S., IP: [24.116.165.60]

L2: to 72t or notAlan,
Good stuff. Don”t you have to hold the stock you”ve taken out of the company planusing NUAfor a minimum of 12 mos 1 day to get the long term capital gains treatment? Any stock sold after moving it out and prior to the 366th day is treated as short term capital gains on the difference between cost basis (already taxed as ordinary income) and sales price. (sorry didn”t really phrase that as a question)

2007-12-21 06:36, By: levy, IP: [170.74.0.41]

L2: to 72t or notNUA CLARIFICATION RE LT GAIN TAX — Per J.K. Lasser YOUR INCOME TAX 2008, pages 159-160 — See example 2 on page 160 — “The holding period of the NUA stock starts from the date of distribution. HOWEVER, if you sell the shares for any amount between the employer”s cost and FMV (Fair Market Value) on date of distribution, your profit is LONG-TERM CAPITAL GAIN REGARDLESS OF HOW LONG YOU HELD THE SHARES. (i.e. you can sell them the next day, and be taxed at the special lower capital gain tax rates up to the gain that occurred while still in the plan).
If you sell for more than the FMV on date of distribution, then only the gain until date of distribution is deemed to be taxed as long-term, and the gain in excess of FMV is taxed based upon the holding period after the date of distribution. For example, employer cost $500, FMV $800, sales proceeds $ 1,000. Gain of $ 300 will always be at long-term capital gains tax rates regardless when sold. The additional $ 200 gain would be taxed at short-term rates until more than 1 year after the date of distribution.2007-12-21 11:25, By: dlzallestaxes, IP: [151.197.92.91]