NUA vs. 401(k) Rollover
In reference to the Fidelity Research Institute Report titled Maximizing the Value of Company Stock at Retirement:
http://www.fidelityresearchinstitute.com/pdf/nua_may2007.pdf
This report compares 4 options and suggests that if you have a longer time horizon of at least 10+ years, then the best option is to roll over company stock to an IRA and diversify. Several assumptions are considered to reach this conclusion and in most cases they are correct.
However, I have prepared an Excel spreadsheet for my own specific situation and in my case, taking the NUA option yields the highest after tax amounts over all holding periods. The key difference is the tax bracket assumption. If I were in a lower tax bracket, then there is a crossover point where it is more beneficial to roll over the stock and continue to grow tax deferred. However, if I assume a top marginal tax rate of 35% and then add state taxes of about 6.5%, it works out that I’m better off taking the hit up front by paying those taxes on my cost basis using the NUA election. Of couse, my other option is to move to a no income tax state and find a way to lower my marginal tax rate at the federal level!
Permalink Submitted by Bruce Steiner on Fri, 2007-10-12 19:47
It’s far more complicated that Fidelity realizes. To compare NUA treatment to the rollover, you have to consider the possible Roth conversion, and you have extend the analysis out to the end of the distribution period following the IRA owner’s death (in other words, the end of the children’s or perhaps even the grandchildren’s life expectancies). There are other factors to consider as well.
If the Fidelity piece gets people to stop and think before choosing NUA treatment or the rollover, it was useful.
Perhaps because not everyone is familiar with NUA, some people think NUA treatment is almost always preferable. It turns out that’s a tremendous oversimplification.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Alan Spross on Sat, 2007-10-13 01:52
You must also consider what the LT cap gain rate will be in future years, and the possiblity of a greater increase in that rate than for marginal rates.
NUA is of course not an all or nothing choice. The option of using NUA on a small portion of the shares that will be sold prior to the LT rates rising may be compelling. The other shares can be sold in the plan or in the IRA rollover for diversification purposes sooner than if large values in the company stock were sitting in a taxable account. And if the plan offers other than average cost accounting, the lower cost basis shares would obviously be the ones selected for NUA.