Net unrealized appreciation
individual age 62 has 401k from prior employer which includes employer stock that was contributed by employer as profit sharing (employee has no basis in employer stock). If individual transfers 401k to TIRA and removes the employer stock, how will basis be determined? employee is in 15% tax bracket so it appears the longterm capital gains tax is 0%.
Permalink Submitted by Alan - IRA critic on Tue, 2014-09-09 17:02
For NUA, the shares must be transferred directly to a brokerage account. Once they are in an IRA, NUA is forfeited. The rest of the 401k plan usually goes to a rollover IRA in a direct rollover. The cost basis of the employer shares is calculated by the plan administrator and is composed of the cost of the shares when purchased on behalf of the employee and added to employee’s qualified plan (401k, ESOP, etc). If dividends are reinvested in more shares, each reinvestment is included in the overall cost basis of the shares. This is totally different than the cost basis for regular taxable investments, since the employer may have purchased all the shares. Employee should get a cost basis quote from the plan before deciding to utilize NUA or not. If that quote is more than 30% of the current share value, NUA is probably not worthwhile unless employee needs to sell immediately for current spending needs. For any shares that are rolled into an IRA and therefore NUA would not apply, or if the shares were simply distributed to the employee and NUA was not applied, then the cost basis of those shares would be based on the fair market value of the shares upon distribution from the plan or from an IRA. Yes, the LTCG rate is 0 for gains within the 15% bracket. Finally, if employee has the shares distributed to a taxable account, he can still decide against using NUA and could roll the shares over to an IRA within 60 days, or could sell the shares and roll the proceeds over to an IRA. But he cannot utilize NUA, sell the shares and then roll over those proceeds.
Permalink Submitted by Don Warnke on Thu, 2014-09-11 14:13
when the employer stock is seperated from the 401k into a retail acount is there any holding period requirement before they can sell the stock and only owe long term capital gains on the gains?
Permalink Submitted by mk foss on Thu, 2014-09-11 17:48
The employer stock can be sold immediately; the amount of NUA is always treated as long term. If the shares go up in value between the date issued and the date sold, some short term gain may also result. Thre is the typical one year holding period for long term for gain in excess of the NUA amount.
Permalink Submitted by Alan - IRA critic on Thu, 2014-09-11 17:56
Don, no waiting period to sell the shares. But if there are additional gains after distribution and the shares are sold in one year or less, the additional gains are taxed at the ST rate.