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Company Stock in your 401(k)....Know this rule before you roll that over to an IRA.
I have company stock in my 401k. Should I roll it into an IRA when I retire? Usually, rolling you 401(k) into an IRA is a perfectly reasonable option to consider depending on fees, flexibility, and other planning strategies. But if you own company stock inside your 401(k), there is a specific tax rule to evaluate before you make that decision that could potentially save you thousands of dollars in taxes. It's called Net Unrealized Appreciation (NUA). Here’s an example. Let's say you've accumulated $1 million in company stock inside your 401(k), but the original cost of those shares was only $200,000. If you roll everything into an IRA, future withdrawals on the entire $1M are generally taxed as ordinary income. But if you qualify for NUA treatment, you may be able to transfer those specific shares of company stock directly into a taxable brokerage account, (while rolling any remaining amount in your 401(k) into an IRA). You would then pay ordinary income tax only on the $200,000 cost basis of the company stock, and eventually pay long-term capital gains rates on the $800,000 of appreciation. That's potentially a 15% or 20% federal tax rate instead of 32% or more on a substantial portion of your retirement savings. Big difference. As always, there are very specific rules you have to follow to qualify, and this strategy isn't right for everyone. You'll also want to consider the upfront tax bill, timing, and how concentrated your portfolio is in company stock. And the timing really matters. Once you've rolled that company stock into an IRA, you've generally lost the opportunity to use NUA on those shares. So if you're approaching retirement and have company stock inside your 401(k), make sure you're working with someone who understands NUA and can evaluate this opportunity before you initiate any rollover. If you'd like us to take a look, click the link in our bio. We'd be happy to help. #RetirementPlanning #TaxPlanning #NUA #CompanyStock
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