Friday, November 30, 2007


Here’s a tax tip for retirees:

Many employers offer an Employee Stock Ownership Plan (ESOP), or allow employees to invest in company stock through their 401(k) or other qualified retirement plan.

Upon retirement or termination of employment you often have the option to rollover the balance in your former employer’s pension plan, including the stock, into an IRA. If your retirement plan contains appreciated employer stock you should not rollover the stock in the plan to an IRA.

Instead you should request that the shares of company stock be distributed to you. You will be taxed on your “basis” in the stock, which will generally be your contributions to purchase the stock over the years, in the year you receive the shares. You will not be taxed on the full market value of the stock.

The difference between your basis (the tax cost) and the market value of the stock is the “net unrealized appreciation” (NUA). This will not be taxed until you sell the stock. When you sell the stock the gain, including the NUA on the shares received, will be taxed at the long-term capital gains rate.

You do not have to hold on to the stock for a period of time, for example a year after the date of withdrawal. You can sell the stock right away. The shares are automatically considered to be long-term. You also can hold on to the stock as long as you want – perhaps selling off blocks of shares as money is needed or over a period of years to spread out the tax cost.

If the stock had been rolled-over into an IRA, when you withdrew money from the rollover IRA it would be fully taxed at ordinary income rates – you would lose the capital gain treatment on the NUA.

Of course if you withdraw the shares before your reach age 59½ (or possibly age 55) you will be subject to the 10% premature withdrawal penalty on the basis of the stock withdrawn.


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