Now is the time that persons of my age need to begin to take Required Minimum Distributions (RMDs) from retirement accounts – IRAs, SEPs, 401(k)s, 403(b)s, etc. A friend from high school and college, and also a fraternity brother, needed to take an RMD from his 401(k) plan.
A fellow fraternity brother, a former corporate controller who is now a stockbroker, told our friend about a special tax benefit related to “Net Unrealized Appreciation” or NUA -
“I explained to him that since he has appreciated stock in his 401(k) it can be rolled into a taxable brokerage account. The appreciated stock would count towards his RMD while the IRS would only tax his cost basis, saving him thousands of dollars in both federal and state taxes.”
I wrote about this tax benefit here back in November of 2008 in “Here Is A Special Tax Trick” -
“Often employee contributions, and employer matches, to a
pre-tax employer pension or savings and investment plan will be invested in the
stock of the employer-corporation.
When the employee leaves the company he/she can (a) remain in the plan until
retirement age (if allowed by the plan), (b) roll-over the balance in the plan
to another tax-deferred account and continue to defer taxable income, or (c)
“take the money and run” and be currently taxed on the distribution.
If the employee holds appreciated stock in his former employer’s company in the plan, he/she should not roll-over the stock to an IRA. The thing to do is to withdraw the actual shares of company stock and rollover any remaining cash balance.
The employee will receive a 1099-R reporting a taxable distribution equal to his/her “basis” in the company stock, which is generally the total amount of employee contributions used to purchase the stock. The employee will not be taxed on the full market value of the stock on the date of distribution.
The difference between the basis and the market value is referred to as “net unrealized appreciation” (NUA). This NUA is not taxed until you actually sell the stock. When the stock is sold the NUA, plus any additional gain, will be taxed as a long-term capital gain at the special preferential tax rate – which could actually be “0%” depending on the circumstances.
If you roll-over the company stock to an IRA, when you withdraw money from the rollover IRA it will be fully taxed at ordinary income rates. You would lose the tax benefit of capital gain treatment on the Net Unrealized Appreciation.
You can sell the company stock right away. You do not have to wait to actually hold the stock for a year after the date of the withdrawal – the sale will automatically be considered to be long-term.”
To add to the post – if you keep the money in the 401(k) all RMDs will be taxed as ordinary income at “regular” tax rates.
Did our friend do as his fraternity brother suggested? No.
“He told me last week that he did his RMD directly from his 401(k). He asked AI, and AI told him I was wrong, that there was no tax benefit in doing a NAV net assets value rollover of company stock.”
Why our fraternity brother would choose artificial intelligence over the real intelligence of a trained and experienced professional, and 50-year friend, is truly a puzzlement.
The bottom line – don’t rely on “AI” for tax advice!
TTFN
