401(k) Savings Plan Investment Review
Choosing between investment options in your savings plan can be a daunting task. How many do you need to be diversified? Which have the appropriate risk level for you?
We will review your investment allocations and contributions and generate a custom designed report for you in which we recommend an asset allocation proposal.
Net Unrealized Appreciation (NUA)
Net Unrealized Appreciation or NUA is a Savings Plan stock distribution option which enables the plan participant to take possession of company shares upon or after retirement without rolling the shares over to an IRA. Electing NUA tax treatment may give investors the opportunity to convert taxable income into a long-term capital gain. This is accomplished by selecting to create NUA on the appreciated value of company stock that is in excess of what you paid for the stock.
- In order to receive NUA tax treatment on your savings plan shares you must be in a qualified plan (like a 401(k), you must take the entire balance in one tax year, and the distribution must qualify as a lump sum distribution. A distribution will qualify as a lump sum distribution if it is on account of:
- Attainment of age 591/2
- Separation from service
- In order to qualify as a lump distribution the total savings plan balance must be distributed within a calendar year. Depending on your heritage, you are allowed to make either one or two distribution per year if you retire after age 55, depending on your company of origin.
- The NUA distribution strategy has three basic components:
- Average Cost Basis represents the price paid when the stock shares were purchased into the retirement plan. If pre-tax, this component is taxed as ordinary income tax rates when the shares are distributed from the plan. If tax paid, this component is not subject to taxation upon distribution.
- NUA is the difference between the average cost basis and the stock’s fair market value when the shares are distributed from your company’s retirement plan. This component is taxed at long term capital gains rates and not due until you sell the stock, unless you specifically elect to pay the tax at the time of distribution.
- Additional appreciation is the difference between the fair market value of your company shares at the time of distribution and the price you receive when you dispose of the shares. The additional appreciation will be taxed as short-term or long-term capital gains depending on how long you hold the shares after they are distributed to you from the plan.
- What happens when I take distribution of company stock and elect NUA tax treatment on the shares?
- In order to create net unrealized appreciation, you need to pay ordinary income taxes on the average cost of the shares at the time of distribution. The exception here is that if tax paid balances are involved in the transaction they are distributed tax free. At your option, you can defer all tax on the NUA portion until the shares are liquidated. When you sell shares, the net unrealized appreciation will be taxed at the long-term capital gains rate, which is currently a maximum of 15%. Any appreciation between the sale price and the distribution value will be taxed at long-term or short-term capital gains rates depending on how long the shares are held after distribution to you from the plan.
Only employer contributions and pretax employee contributions are eligible for this net unrealized appreciation tax strategy.
Summary - Normally unless you have a short-term need for capital or you are in a very high tax bracket it may make sense to avoid paying taxes today and rollover your retirement funds into an IRA. Rolling over your retirement assets into an IRA may enable you to take advantage of the benefits of tax deferred compounding. The exception is if you have savings plan shares that have a tax paid basis. Retirees should take a close look at shares that have a tax paid basis. The cost basis portion of these shares are distributed tax free and the appreciation portion is taxed at long term capital gains rates upon liquidation if they select NUA tax treatment. Shares that have a low pre-tax basis ($15 or less for example) should also be reviewed before making a final decision to rollover shares to an IRA or to receive an NUA stock distribution.
There may be some estate planning issues involving this strategy (heirs do not get the step-up in basis at death and heirs will be required to pay the capital gains tax on the NUA). It is important to carefully review your personal situation to see if this strategy would be of benefit. Associates of Krosnowski & Scott, LLC are not tax consultants. Before you employee any strategies, you should seek the services of a qualified tax professional.
NUA Example Letter
Retirement Income Analysis (RIA)
Have you thought about exactly how much money you will need in order to retire? How about how long the money you’ve saved will last? This report attempts to show you if your current assets will be sufficient to meet your retirement goal (adjusted for taxes and inflation) and how long your retirement assets will last, taking into consideration your on-going earned income, the money you’ve saved (IRA, 401(k), investments, etc.), as well as the anticipated growth of your investment assets. This hypothetical report can be re-run with varying scenarios.
We will run this report attempting to show how cash flow may be generated to meet your annual income needs. In addition to illustrating cash flow generation, the RIA also shows how your assets might grow during retirement to protect against inflation.
This report is used for illustration only. It is not intended to show actual performance and rates of return are hypothetical and not predicative of any specific investment. Interest rates, or values that are set forth in the illustration, are not guaranteed and taxes, sales charges and investment expenses are not considered. Your actual results will vary.
IRA 72(t) Income Distribution Analysis (SEPP)
Did you know that there is a way you can withdraw money from you IRA before you are 59 ˝? Normally there is a 10% penalty on premature (before 59 ˝) IRA withdrawals.
Exception: If withdrawn annually in Substantially Equal Periodic Payments (SEPP) for 5 years or until age 59 ˝ (whichever is further), the IRA 10% premature withdrawal penalty may be avoided.
We can run a report for you, which will illustrate just how much income you may be able to withdraw from your IRA prior to age 59 ˝ and avoid the 10% penalty.
These withdrawals must be structured properly. Before implementing any strategy, you should seek the services of a qualified tax professional.
Investment Portfolio Review Analysis (Financial Physical)
If you have assets invested with another firm, you may be interested in a second opinion. Using our financial analysis software, we will generate a report for you. It will show your current asset allocation among cash, bonds and stocks and identify your stock sector and asset class breakout (large cap vs. small cap, value vs. growth).
We will then provide you with an overall review of potential areas that in our opinion might improve your portfolio position, including a comprehensive fee, performance, and risk evaluation.